Inflation is burning with gas: literally. Overall prices grew 1.3 percent in June compared with May and 9.1 percent over the past year, the greatest rate of inflation since the early 1980s and more than what economists had anticipated. The dramatic reading will probably only strengthen the Federal Reserve’s resolve to raise interest rates quickly, and the stock market immediately responded, with futures prices diving.
The overall economic picture is a confusing one. Inflation is quite high all over the world, as covid-specific problems around supply chains have now mutated into a massive shock to the energy and commodities markets thanks to the disruptions stemming from the Russian war in Ukraine. But new jobs are still getting added at high rates, even if the pace of job growth has slowed down. All the while, many forecasters continue to predict a recession either later this year or early next year — one largely brought on by the Fed’s aggressive rate increases.
Managing Editor Kay Steiger sat down with Grid’s Domestic Economics Reporter Matthew Zeitlin to ask what is going on with inflation numbers in this very odd economy.
Kay Steiger: What does this inflation report say? Is it what we were expecting?
Matthew Zeitlin: Economists polled by Bloomberg expected 1.1 percent inflation compared to May and 8.8 percent over the past year. The numbers today are 1.3 percent and 9.1 percent. So inflation is higher than expected and has picked up recently. (Inflation was 1 percent in May.)
KS: Talk to me about the differences between these two numbers that tell a very different story about inflation, core and overall. What does that tell us?
MZ: Both headline inflation — which includes everything — and “core” inflation, which excludes food and energy, came in hot in the June reading. The core measure rose 0.7 percent in June, which is slightly faster than in May, even if the pace of annual core inflation is slightly slowing down.
The headline reading was still higher than the core reading, and there is some divergence in the two. But inflation remains quite broad-based. There were price increases in “almost all major component indexes,” the Bureau of Labor Statistics said.
That said, energy is still a huge deal when it comes to the overall inflation picture. Energy prices alone rose 7.5 percent in June, according to the BLS figures, and made up for about half of the increase in overall prices, with gasoline prices going up faster than overall energy prices. And there’s been some relief in gas prices, which peaked at just over $5 per gallon in June and are now down about 30 cents.
KS: What about housing? One thing we know is that the Fed’s rate hikes have had a huge effect on mortgage rates.
MZ: The figures showed housing as one of the largest contributors to inflation and one that has been rising over the last several months.
While the rate hikes have driven up mortgage rates at their fastest pace on record, the effect on the overall housing market is not entirely clear. It’s not clear that higher rates will lead to lower housing costs. That’s because higher interest rates can mean less new housing construction, and for those who are buying a house, any decline in prices can be eaten back up by paying more interest on their mortgage.
KS: I saw some speculation by Neil Irwin in Axios that the Fed may be raising rates even though the “inflation problem” is already over. What do you think of that?
MZ: It’s hard to look at today’s report and say the inflation problem is over. But it’s certainly not the case that we’re seeing out-of-control inflation driven by a cycle of higher prices leading to higher wages and then higher prices again. It is possible that inflation will begin to moderate, but it hasn’t happened yet.
KS: Why does it always seem like economists and politicians overlearn the last lesson? In the 2020 stimulus, they put tons of money into state and local funding, even though that’s not really what was needed, because that’s what was missing in the 2008 recession. Now, the Fed is raising rates even though the inflation problem — or at least the one that the Fed can do anything about — might be starting to cool down. What’s going on here?
MZ: The Fed takes its “credibility” very seriously. This is the idea that when it tries to do something — in this case bring inflation down — it needs to do so, or else its future promises will become meaningless. So, it seems like it’s willing to overcorrect on raising rates even if the economy is already slowing down and much of the recent inflation is being driven by something the Fed has little to no control over, in this case, energy prices.
This approach has not been without controversy within the Fed. Esther George, the president of the Federal Reserve Bank of Kansas City, recently gave a speech outlining the risk of dramatic and continued rate hikes to the economy as a whole.
KS: What options are there for bringing down energy prices? I know the big thing is gas now, but we’re going to be heading into winter soon enough, and people can’t really back off on heating their homes the way they can on road trips.
MZ: In Europe, where the energy problem is much more drastic, we’re already seeing dramatic policies either being implemented or proposed. French energy companies have called for conservation; in Germany, they’re literally dimming the lights. These type of centralized responses to energy prices are not the way we do things in the U.S. typically, not least because much of Europe may be facing a dire energy shortage as Russian deliveries of natural gas dwindle.
But where we do see shortages or mismatches between energy demand and what can be supplied, we do see utility operators, for example, requesting households use less, as we saw in Texas this week. And while obviously homes have to be heated, when the U.S. faced its most dramatic energy crisis in the 1970s, the White House encouraged households to keep the thermostat at 65, and there’s some evidence showing that it worked. But I think the last thing Joe Biden wants to do right now is invite any comparisons to Jimmy Carter.
Thanks to Lillian Barkley for copy editing this article.