A New 40-Year High Is Reached In Inflation. What Does That Imply For Consumers And The Upcoming Rate Hike By The Fed?

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The cost of petrol, food, and rent continued to rise in June, driving inflation up once more to a 40-year high and presumably reinforcing the Federal Reserve’s decision to make another significant rate hike this month.

The Labor Department’s Consumer Price Index revealed on Wednesday that prices rose 9.1 percent from a year earlier, up from an annual rate of 8.6 percent the previous month and the highest increase since November 1981. According to economists surveyed by Bloomberg, inflation would reach 8.8 percent.

Consumer prices rose by 1.3 percent on a monthly basis, the biggest increase of this kind since 2005, as opposed to a 1 percent gain in May.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, described the most recent price increase as “ouch” in a research note.

He and other analysts remarked that, in light of indications that inflation is prepared to gradually ease, June likely marks its top, despite the fact that a similar prediction made in the spring turned out to be untimely.

Reaction on the stock market
The news supports the Federal Reserve’s plans to aggressively fight inflation by increasing its benchmark interest rate by a hefty three-quarters of a percentage point for a second consecutive month.

The outcome upset the already pessimistic investors. The Dow Jones Industrial Average dropped by more than 300 points following the announcement of the most recent numbers. The S&P 500 dropped by 37 points, or around 1%. Furthermore, 10-year note yields increased. They stayed at 3.03 percent throughout mid-morning trading.

What is the source of inflation?
Gasoline prices, which rose 59.9 percent annually and 11.2 percent over the previous month to lead June’s jump. The good news is that unleaded regular dropped from $5 a month ago to an average of $4.65 on Tuesday.

Prices for groceries increased by 1% from May and by 12.2% over the previous year. Because Russia’s war in Ukraine has affected the world’s supplies of oil, wheat, corn, and other commodities, both gas and food prices have increased significantly.

Prices for cereal increased by 14.2 percent from a year earlier and 2.5 percent from the previous month in June. Monthly and yearly increases in bread were both 1.6 and 10.8 percent. Costs for chicken rose by 1.5 percent from May and by 17. yt

There were some positive indicators. Prices for bacon dropped 1.9 percent, marking the second consecutive significant monthly reduction. Additionally, prices for meat and veal dropped by 2.3%.

Will the cost of food decrease?
Amid worries of a recession and declining consumer demand, commodity prices have fallen recently. According to Sam Bullard, economist at Wells Fargo, this has already lowered petrol prices and prepared the way for more gradual increases in food prices in the coming months.

However, according to Pooja Sriram, an economist at Barclays, increasing fertilizer costs for farmers might maintain relatively high grocery prices all year long. The Ukraine war has increased the price of fertilizer as well as its main component, natural gas, since Russia is the world’s largest exporter of this product.

Following a 0.6 percent increase in May, core prices—which don’t include volatile food and energy prices—rose by 0.7 percent in June. This lowered the annual increase from 6 percent to 5.9 percent.

What is a rent increase?
Due to people moving into their own flats after staying with family members during the pandemic, rent increased by 0.8 percent each month and 5.8 percent over the previous year.

For summertime travelers, there were some favorable improvements. Despite high demand, airline prices dropped by 1.8% and hotel prices by 2.8%, but both are still higher than they were a year ago by 34.1 % and 10%, respectively.

There are signs that the rate of inflation will probably decline in the months to come. Along with declining commodity prices, supply chain issues are improving, wage growth may be slowing down, and retailers’ excessive inventory are forcing them to provide significant discounts to customers.

Additionally, now that the pandemic is generally abating, consumer spending has started to move from products to services, such as eating out and traveling.

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