Inflation is rising by levels not seen in more than 40 years with food and energy prices surging, boosting the likelihood of an outsized rate hike from the Federal Reserve later this month.
The Consumer Price Index jumped 9.1% from June 2021 to June 2022, the largest year-over-year increase in the market's preferred inflation metric since November 1981, the Bureau of Labor Statistics reported July 13. Economists had expected an increase of 8.8%, according to economic research service Econoday.
"The inflation situation is getting more dire by the day," said Callie Cox, a U.S. investment analyst at eToro.
Energy prices, rocked by Russia's invasion of Ukraine and ongoing supply constraints, saw some of the largest increases from June 2021 to June 2022, the CPI data shows. Fuel oil jumped 98.5%, gasoline rose 59.9% and utility gas service increases 38.4% over that time.
Food costs also saw significant increases with margarine climbing 34.5%, eggs up 33.1% and butter up 21.3% year over year.
As prices have risen, wages have not kept pace.
As CPI increased by 9.1% hourly wages rose by 5.1% from June 2021 to June 2022, down from the 5.3% year-over-year growth seen in May and the 5.6% growth seen in March, when annual wage growth may have peaked.
Inflation, which is being felt more severely by lower income Americans, is also impacting regions of the U.S. differently.
Year-over-year inflation grew in June by 9.8% in the southern U.S., for example, but 7.6% in the northeast.
Big rate hike
The sharp rise in inflation could push the Fed to ramp up its efforts to curb inflation through historically large rate hikes.
"With supply conditions showing little sign of improvement the onus is on the Fed to hit the brakes via higher rates to allow demand to better match supply conditions," said James Knightley, chief international economist with ING, in a July 13 note. "The recession threat is rising."
Shortly after the CPI data was released, the odds that the Fed would hike its benchmark federal funds rate by 100 basis points at its July meeting jumped to nearly 50%, up from less than 8% a day earlier, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. The other half of market watchers are still expecting a 75 basis point hike at the July meeting, according to the FedWatch Tool.
"We've come a long way with rate hikes, but there may be more to go based on this report," Cox with eToro said. "There's no obvious benefit to shocking the markets with an unexpectedly big rate hike here. But it's clear that the Fed needs to stay somewhat aggressive, because one-half of its mandate is out of control."
The Fed follows a dual mandate while crafting monetary policy: maximum employment and price stability. The latter mandate has been threatened by high inflation.
At its June meeting, the Fed hiked rates by 75 basis points, its largest one-time rate hike since 1994. The Fed has raised rates by 150 basis points since March after two years of keeping rates near zero in response to the global pandemic.
Still, the Fed may still be likely to pursue a 75 basis point hike since the ongoing rise in inflation may fit within their expectations, said Fawad Razaqzada, a market analyst with City Index and FOREX.com.
"They had projected inflation would continue to overshoot," Razaqzada said.
In addition, the large increase in gasoline prices in June may also give the Fed pause now that oil prices have fallen below $100 per barrel and gas prices appear to be trending down, said Michael Hewson, chief market analyst at CMC Markets.
Market expectations for a 100 basis point hike from the Fed this month will likely remain high, but Hewson noted that other measures of inflation have been falling or are flat.
The Personal Consumption Expenditures price index, another inflation measure, saw year-over-year growth of 6.3% in May, the same as it saw in April and down from 6.6% growth in March.