The Consumer Price Index, the major inflation metric, surged by 5.4 percent on the year through June, representing the largest year-over-year increase since 2008, according to data released Tuesday by the Department of Labor.
The jump exceeded many financial firms’ and economists’ predictions. For example, economists at Goldman Sachs expected only a 5.1 percent increase from the prior year, up from 5 percent the prior month.
The increase was largely driven by price hikes in the used car and truck market, accounting for over a third of the increase, the Labor Department said. Federal Reserve and elected officials have expected inflation to moderate as the supply and demand disequilibriums in the average consumer basket rectify now that the pandemic is dwindling. They’ve suggested that production bottlenecks and supply squeezes are largely to blame for the upticks, which they claim will resolve over time rather than contribute to sustained inflation.
A large component in the inflation equation that the Fed can’t control as easily is inflation expectations, or what people think the direction of prices will be. Near-term consumer inflation expectations have risen recently according to a Federal Reserve Bank of New York survey. Year-ahead inflation expectations jumped 0.8 points to a new high of 4.8 percent in June, but inflation expectations over the next three years stayed relatively constant at 3.6 percent. One interpretation of that data is that American households are increasingly sensitive to inflation movements in the short term but not necessarily the medium to long term.
Exceeding economist expectations, the CPI rose 0.9 percent from May to June, faster than the 0.6 percent month-over-month increase the previous month. But even with food and energy costs removed from the commodity bundle, given that they’re subject to more dramatic fluctuations, the CPI still increased 0.9 percent over the month, up from 0.7 percent the previous month.
The cues from some Fed officials have been mixed and somewhat ambiguous. “It’s still too early to tell how things are going to evolve,” John C. Williams, the president of the Federal Reserve Bank of New York, said to reporters Monday. “We’ll just have to watch it carefully.”
When asked about the future of the Fed’s gargantuan asset purchase monetary policy, once referred to as “quantitative easing” after the 2008 financial crisis, William said: “The last few months, and I guess the last three months, we’ve seen some pretty strong movements, and kind of crosscurrents, both in the employment data and the inflation data.”
If inflation persists but wages do not move in lockstep with it, an effective tax will be imposed on the consumer, reducing the length a dollar can be stretched to pay for goods and services.
To curb inflation, the Fed has a few but limited weapons in its arsenal. One instrument at its disposal is to raise rates to prevent the economy from overheating, but that carries with it the risk of adversely affecting the stock market and other asset classes.