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Inflation hits highest level in 40 years as housing market sputters

Fuel and housing costs were the biggest culprits to the June increase

Driven by surging prices in gasoline, shelter and food, inflation in the U.S. hit 9.1% in June, the highest level in 40 years, the Bureau of Labor Statistics reported Wednesday. The news raises the specter that the Federal Reserve will raise the benchmark rate by 75 or even 100 basis points at its upcoming July meeting.

In June, the Consumer Price Index (CPI) reached 1.3% seasonally adjusted, up from 1% in May. The inflation estimate was a 1.1% increase in June and 8.88% over the last 12 months. 

“Mortgage rates are ramping up again because inflation is higher than investors had expected,” said Holden Lewis of NerdWallet. “Your mortgage rate is the price of borrowing money, and the price of money goes up when inflation is high. With overall prices rising at 9.1%, their fastest pace since November 1981, mortgage rates are zooming upward, too. The Federal Reserve is adding to the upward pressure because it’s going to yank interest rates higher on July 27 to choke inflation.”

The Fed raised rates by 75 basis points in its meeting on June 15 and its chairman Jerome Powell indicated that it could increase more 50 bps or 75 bps in its July meeting. But given that the CPI came in higher than anticipated, the Fed might be tempted to raise rates even further to smother inflation.

The CPI showed that the energy index rose 7.5% in June and contributed to nearly half of the overall inflation increase, with Americans paying 11.2% more to fill their tanks with gasoline. In 12 months, the energy index is 41.6% higher, the largest 12-month increase since April 1980. 

The food index rose 1% in June and 10.4% over the last 12 months.

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Excluding food and energy, more volatile items, the CPI was up 0.7% in June, after increasing 0.6% in April and May. Over the last 12 months, inflation that excludes food and energy rose 5.9%. Shelter costs – which account for 40% of CPI – have risen 5.6% over the last 12 months.

Officials at the Fed are trying to control inflation after letting interest rates rest at low levels in 2020 and 2021 due to the Covid-19 pandemic, stoking fears of a recession. 

But the job market continues to be strong. In June, a total of 372,000 nonfarm payroll jobs were added in the U.S, compared to 384,000 in May. The unemployment rate of 3.6% has now remained unchanged for four months in a row and is marginally higher than the pre-pandemic level of 3.5% recorded in February 2020 

The housing market has been very choppy in recent months. A sharp uptick in mortgage rates has sapped buyer demand, and purchase volume continues to fall despite rising inventory. Purchase rates went from 2.90% a year ago to 5.30% last week, according to the latest Freddie Mac PMMS Index. The increase in mortgage rates is causing home prices to rise more slowly, which will eventually contribute to a lower inflation rate. But it will take time.

“Monetary policy tightening is definitely curtailing demand for housing, but we won’t see the ‘inflation benefit’ for a while to come,” said Mark Flemming, First American Financial‘s chief economist. “Bottom line – headwinds abound for the Federal Reserve inflation fight.”

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