Fasten your seatbelts, because inflation’s still going to be a bumpy ride for the next few months. Despite repeated insistence from the White House that we’ve seen the worst of inflation, the producer-price index rose at its fastest level in three months in June.
Producer prices soared by 11.3% in June over a year ago as consumers continue to struggle with skyrocketing prices for just about everything.
The U.S. Bureau of Labor Statistics released its Producer Price Index data Thursday, which showed a 1.1% increase last month, contributing to a 11.3% increase in the past 12 months, “the largest increase since a record 11.6% jump in March 2022.”
“This rise followed advances of 0.9 percent in May and 0.4 percent in April,” BLS said. “In June, three-fourths of the advance in the index for final demand was due to a 2.4-percent rise in prices for final demand goods. The index for final demand services increased 0.4 percent.”
Gas prices for regular and diesel gas hit all-time highs last month, leading to a trickle down effect of higher prices for all kinds of goods and services through all stages of the supply chain. Even without higher energy costs, though, prices still significantly increased.
“Prices for final demand less foods, energy, and trade services moved up 0.3 percent in June after advancing 0.4 percent in both May and April,” BLS said. “For the 12 months ended in June, the index for final demand less foods, energy, and trade services rose 6.4 percent.”
Goods become more expensive when energy costs are higher, in part because the cost to ship them has skyrocketed.
“Nearly 90 percent of the June increase can be traced to a 10.0-percent jump in prices for final demand energy,” BLS said. “The indexes for final demand goods less foods and energy and for final demand foods advanced 0.5 percent and 0.1 percent, respectively.”
The PPI data comes just one day after the BLS Consumer Price Index showed a 9.1% increase in consumer prices in the previous 12 months, the highest in more than four decades. Both of these inflation markers show that prices are continuing to rise, and experts say it could get worse later this year.
“The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors,” BLS said of its consumer price index. “The energy index rose 7.5 percent over the month and contributed nearly half of the all items increase, with the gasoline index rising 11.2 percent and the other major component indexes also rising. The food index rose 1.0 percent in June, as did the food at home index."
President Biden called the report “out-of-date” while noting the inflation reading was “unacceptably high.” He said that the report does not reflect falling gasoline prices over the past few weeks. Well, of course it doesn’t, since the report is for prices in June.
He also said that core inflation “came down for the third month in a row.” That’s a misleading use of year-on-year numbers. Core inflation (which excludes food and energy) rose 0.7 percent last month after increasing by 0.6 percent in each of the two months prior. That works out to an average annualized core inflation rate of 7.6 percent over the past three months. Core inflation is holding steady at a disastrously high level.
Higher energy prices also impacted consumer costs significantly.
“The index for all items less food and energy rose 0.7 percent in June, after increasing 0.6 percent in the preceding two months,” BLS said. “While almost all major component indexes increased over the month, the largest contributors were the indexes for shelter, used cars and trucks, medical care, motor vehicle insurance, and new vehicles. The indexes for motor vehicle repair, apparel, household furnishings and operations, and recreation also increased in June. Among the few major component indexes to decline in June were lodging away from home and airline fares.”
When the current bout of inflation began, Democrats waved it away by pointing to volatility in energy prices and saying core inflation was doing fine. Now, they’re pointing to energy prices to distract from core inflation.
Biden was, however, wise to conclude his statement by saying, “I will continue to give the Federal Reserve the room it needs to help it combat inflation.” He has consistently held that line, breaking a long tradition of presidents of both parties harassing the Federal Reserve to help their political fortunes. The task of bringing inflation back under control is indeed mostly on the Federal Reserve.
The Fed can’t do much about energy prices, but it can do more to tighten monetary policy. The total spending level in the U.S., unlike in Europe, remains above its pre-pandemic trend. Combined with the high core inflation, the trajectory of spending indicates that our inflation has a significant demand-side component that goes beyond supply constraints and energy prices. The FOMC should at least repeat a 75-basis-point interest-rate increase at its next meeting at the end of the month. If it’s going to surprise, it should do so on the upside. The Bank of Canada raised its key interest rate by 100 basis points today. It would not be out of line for the Fed to do the same.
And getting the inflation rate to inch downward is an insufficient goal. The Fed’s target is 2 percent inflation. It has led many people to believe that it wants to hit that rate on average, which means that it should be aiming for below 2 percent to compensate for the excessive inflation of the last 15 months. And the longer inflation persists at a high level, the more expectations of high inflation become entrenched throughout the economy.
Fed governors know all of this, and the minutes from the last FOMC meeting indicate they retain a commitment to the 2 percent target. But if fighting inflation produces a recession, they could get distracted. They should keep their resolve. A short recession is preferable to the likely alternative: stagflation followed by a worse recession.
And Congress must not make things worse by passing any major spending bills. News from Capitol Hill indicates that some form of Build Back Better is being discussed again. Even supposedly paid-for spending should be opposed, both because the federal government has enough budget obligations already and because Democrats’ maximalist strategy on budget gimmicks, as demonstrated all of last year, means their pay-fors can’t be trusted. U.S. bondholders must be reassured that the federal government intends to pay them back in real terms, not inflated currency, and that means a long-term commitment to basic fiscal responsibility.
Even if headline inflation comes down next month due to a decline in gasoline prices, the fundamental task before the Federal Reserve will remain the same. And politicians — especially Senator Joe Manchin — must avoid adding to the fire by approving more spending. The No. 1 mission for domestic policy right now is getting inflation back under control, and so far it remains unfulfilled.