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US inflation at 40-year high

July 13, 2022

Inflation in the US sent prices for gas, food and rent surging in the fastest rate since 1981. The pressure on US households is likely to lead to the Federal Reserve hiking interest rates again.

The US Federal Reserve, the country's central bank
The US Federal Reserve is expected to hike intreest rates to remove pressure caused by inflation on US householdsImage: picture alliance/Zuma Wire/C. Myers

US inflation reached a four-decade high in June, with consumer prices soaring by 9.1% compared to the previous year, the US government said on Wednesday.

It is the biggest consumer price hike since 1981 and alone is up from an 8.6% price hike in May.

Month to month, prices rose 1.3% from May to June, whereas from April to May prices only jumped 1%.

Markets reacted as the S&P 500 and Dow Jones Industrial Average tumbled more than 1% on the report's release.

The increase in prices is putting further pressure on US households, likely to lead the Federal Reserve to hike interest rates significantly again.

What is inflation?

In a statement, US President Joe Biden said, "While today's headline inflation reading is unacceptably high, it is also out-of-date." He added, "Today's data does not reflect the full impact of nearly 30 days of decreases in gas prices."

Who is impacted by inflation in the US?

The cost of necessities is rising faster than incomes. Lower income minorities have been hit particularly hard as a larger portion of their income goes to essentials such as food, transportation and housing.

While gas prices have dropped from a high near $5 (€4.99) per gallon in mid-June to $4.66 average nationwide, such affirmations have not matched the hopes of some economists that inflation had peaked in the short-term. 

Shipping and commodity costs have also begun to drop. Americans' anxieties about inflation have also shown signs of easing, a sign prices may level out over time.

What are the political consequences of US inflation being so high?

Inflation has caused a steep drop in consumer confidence which has political ramifications for both Biden and the Democrats as the political focus in the country turns towards Congressional mid-term elections in the fall.

US Federal Reserve Chair Jerome Powell has sought the most aggressive series of rate hikes in the US since the 1980s to tamp down the effects of inflation. The Federal Reserve is now expected to raise interest rates by three quarters of a point later this month, with more rate hikes to follow.

One problem with the approach is that higher rates could mean greater borrowing costs, tightening credit at a time when other benchmarks are beginning to ease — potentially triggering a recession by next year should the economy contract with consumer spending.

There are warning signals from the bond market that the US could face recession with the 10-year yield on Treasury bonds at 3.06%, just below the two-year bond yield, indicating some investors anticipate a recession in the next year or two.

ar/fb (AFP, AP, Reuters)