US inflation hits fresh 40-year high as price hikes spread

WASHINGTON (AP) – The prices of gasoline, groceries and most other goods and services soared in May, pushing inflation to a new four-decade high and giving American households no respite from rising costs.

Consumer prices rose 8.6% year-on-year last month, faster than April’s 8.3% year-on-year rise, the Labor Department said on Friday. The new rate of inflation, the highest since 1981, will increase pressure on the Federal Reserve to continue raising interest rates aggressively.

On a monthly basis, prices rose 1% from April to May, much faster than the 0.3% increase from March to April. Contributing to this increase were much higher prices for everything from airline tickets to restaurant meals to new and used cars. These price spikes also increased so-called “core” inflation, a measure that excludes volatile food and energy prices. In May, core prices rose 0.6% for the second straight month. They are now 6% higher than a year ago.

Friday’s report underscored fears that inflation is spreading well beyond energy and goods, prices of which are being pushed up by congested supply chains and the Russian invasion of Ukraine. It also caused stock prices to fall. Increasing pressure on the Fed to raise rates even faster – which means more expensive credit for consumers and businesses – will also increase the risk of a recession.

“Virtually every sector has higher-than-normal inflation,” said Ethan Harris, head of global economic research at Bank of America. “It has found its way into every nook and cranny of the economy. That makes it worrying because it means it’s likely to persist.”

Gas prices rose 4% in May alone and are up nearly 50% in a year. The national median price at the pump hit $4.99 on Fridayis nearing an inflation-adjusted record high of $5.40, according to AAA.

The cost of groceries rose nearly 12% last month from a year earlier, the sharpest such increase since 1979. Soaring grain and fertilizer prices after Russia’s war in Ukraine is intensifying this rise. Restaurant prices rose 7.4% last year, the biggest 12-month gain since 1981, reflecting higher food and labor costs.

Employers are facing tremendous pressure to raise wages in a labor market that remains resilient, with low unemployment, few layoffs and near-record vacancies. But while average wages are rising at the fastest pace in decades, they’re not rising fast enough for most workers to keep up with inflation. Many households have accumulated savings from government stimulus funds during the pandemic and now need to use those savings to pay bills.

Housing costs continue to rise. The state housing index, which includes rents, hotel prices and a measure of what it costs to own a home, rose 5.5% last year, the fastest since 1991. Airfares have risen nearly 38% in the past year, the sharpest such increase since 1980.

Unbridled inflation puts families under severe pressure. Low-income and Black and Hispanic Americans in particular are struggling because, on average, a larger portion of their income is spent on necessities.

Given Friday’s inflation reading, the Fed is all but certain to deliver its fastest string of rate hikes in three decades. By raising the cost of borrowing drastically, the Fed hopes to cool spending and growth enough to contain inflation without plunging the economy into recession. It’s going to be a difficult balancing act.

The Fed has signaled that it will raise its short-term interest rate by half a point next week and again in July – double the usual hike. Some investors had hoped the Fed would then cut rate hikes to a quarter point before its September meeting, or perhaps even pause its credit tightening. But amidst blisteringly hot inflation, investors are now expecting another half-point hike in September, which would be the fourth since April.

Polls show that Americans view high inflation as the nation’s biggest problemand most disapprove of President Joe Biden’s handling of the economy. Republicans in Congress are hammering Democrats on the issue ahead of this fall’s midterm elections.

On Friday, Biden addressed the latest numbers in a speech at the Port of Los Angeles, which is now moving a record amount of freight under an agreement the White House has adopted. However, even if the number of ships waiting in port to be unloaded has fallen sharply, inflation has not fallen.

“My administration,” said the President, “will continue to do everything it can to lower prices for the American people.”

Rising prices have forced Rocky Harper of Tucson, Arizona, to take up gig jobs for delivery companies in addition to his regular full-time job at a package delivery company. His day job makes $800 a week, he said, which “used to be really good money and is now just over poor.”

Harper, 44, said he and his fiancée are delaying the wedding because they can’t afford it right now. They shut down Netflix and Hulu. His car’s catalytic converter was recently stolen – a theft that is becoming increasingly common – for the rare metals it contains, which have skyrocketed in price. A repair cost $1,300.

“With the food, the gas and the rent – holy cow,” he said. “I work a lot of overtime just to make it, just to hold it together.”

A World Bank report this week made it clear that high inflation is a global problem that threatens to slow economies around the world. In the 19 countries that use the euro currency, inflation, fueled by rising food and fuel prices, hit a record 8.1% last monthwhich led to the European Central Bank announcing it would be raising interest rates for the first time in 11 yearsstarting in July and again in September.

In the coming months, prices in the United States could relax somewhat. Some major retailers including Target, Walmart and Macy’s, are now stuck with too much patio furniture, electronics and other goods that are suddenly no longer in demand. Target said it’s cutting prices due to mountains of unsold inventory.

Although Americans have attacked the economy, they have largely maintained their spending. They are increasingly turning to credit cards, with total card debt rising sharply in April, the Fed reported, although that debt is only just above pre-pandemic levels.

How long these trends — higher wages, extra savings, and rising credit card debt — are allowing Americans to keep spending to see if a recession can be avoided. In order to cool inflation, spending growth must be slowed down.

For low-income Americans, there are signs that it’s already slowing. Sales at retailers targeting price-conscious shoppers are falteringhow dollar stores. According to Walmart, customers are switching to cheaper items.

Research from the Bank of America Institute, which uses anonymous data from millions of its customers’ credit and debit card accounts, shows that gasoline is eating up a bigger chunk of budgets.

For low-income households — defined as households earning less than $50,000 — spending on gasoline accounted for nearly 10% of all credit and debit card spending in the last week of May, the institute said. That’s up from about 7.5% in February, a steep rise in such a short period of time.

Many small businesses are still struggling to keep up with rising inventory and labor costs, a sign that price increases will continue. Andrew McDowell, founder of With Love Market & Cafe in Los Angeles, said he’s paying more for grocery supplies, workers and reusable bags that used to cost him 23 cents but are now 45 cents.

The company’s chicken BLT now costs 20% more than it did before the pandemic. McDowell said he was struggling with the highest prices for supplies and workers he had ever faced. He thinks he may have to raise prices again, by 10% to 20%.

“Every product is affected, every aspect of the business is affected,” McDowell said.

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