Rising US inflation puts Fed on track for further big rate hikes

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Washington — Searing US inflation shows few signs of abating, putting the Federal Reserve on track to continue its aggressive interest rate hikes to help cool high prices that are challenging Joe Biden’s presidency.

Hoped-for signs of relief for American families failed to materialize in May as consumer prices hit a new four-decade high, rising 8.6% and surpassing what economists thought was March’s peak. .

As Russia’s war on Ukraine continues to pressure global fuel and food prices, and amid continued supply chain uncertainties due to Covid-19 lockdowns in Asia, analysts now say that the expected easing of inflationary pressures will take much longer to materialize.

The US central bank had already signaled plans for bigger increases in the benchmark borrowing rate this week and next month, but the odds are growing that the Fed will have to be even more aggressive – raising the risk that the economy slips into a recession.

The latest inflation report – the last major data point before the Fed’s policy meeting on Tuesday and Wednesday – also drowns hopes that central bankers can call a ceasefire in September ahead of the main congressional elections. , where Biden’s Democrats are expected to take damaging losses.

Prices continued to rise last month for a range of goods, including housing, groceries, airfares and used and new vehicles, setting new records in several categories, according to data from the Department of work.

Energy soared 34.6% in the past year, the fastest since September 2005, while food jumped 10.1%, and the cost of fuel oil more than doubled, jumping 106 .7%, the largest increase in the history of the CPI, which dates back to 1935.

The surge in the CPI “increases the likelihood of even more aggressive Fed rate hikes to dampen inflationary expectations,” said Mickey Levy of Berenberg Capital Markets.

If the Federal Open Market Committee decides on a giant leap — three-quarters of a point instead of the planned half-point hike — it would be the first 75-basis-point rate hike since November 1994.

Diane Swonk of Grant Thornton indicated that such a decision is possible.

“They’re late and eager to catch up,” she said on Twitter. “The Fed needs to reduce demand to respond to a world of limited supply. Ugly in many ways.

Barclays economists are now calling for a 0.75 point increase, although Moody’s Ryan Sweet says the odds are slim, and LBBW’s Karl Haeling expects three more half-point increases.

– Political considerations? –

Biden faces growing political backlash as high prices increase pain for American families, who are seeing daily records at the gas pump and higher grocery bills due to fallout from the Ukraine invasion by Russian leader Vladimir Putin.

Unlike his predecessor Donald Trump, who relentlessly attacked the Fed and its Chairman Jerome Powell, Biden publicly backed the central bank’s efforts.

Biden, who blames “Putin’s price hike” for accelerating inflation, said Washington “needs to do more — and quickly — to bring prices down here in the United States.”

Hoping to avoid a devastating setback in the November election that could return control of the legislature to opposition Republicans, Biden has urged Congress to approve legislation aimed at reducing the costs of key commodities such as drugs and services such as than shipping to soften the blow for American consumers.

Some analysts had speculated that Powell might ask for a delay in interest rate moves at the September FOMC meeting, but economist Levy echoed the prevailing view that a pause in hikes rate is now “increasingly unlikely”.

Powell has always insisted that central bankers avoid political considerations and focus on what is best for the economy.

The Fed, which has already acknowledged that slowing demand will spell trouble, hopes to ease price pressures without stifling economic growth – but that looks increasingly difficult.

Gita Gopinath, number two at the International Monetary Fund, said last week that US central bankers were taking an “incredibly narrow path” to achieve a soft landing and avoid a sharp rise in unemployment.

“It will be a real challenge to get inflation down…without turbulence,” she told a Financial Times conference, adding that it could “require much bigger rate hikes.”


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