American consumers haven’t seen any relief from rising prices according to the latest US inflation report. In fact, they’ve been getting worse.

And that could mean even more aggressive interest-rate increases from the Federal Reserve, further raising the risk that the US economy might be forced into recession in order to cool off rising prices.

For good news on inflation, it may take looking ahead to the July report, with gas and food prices having fallen in recent weeks. That could mean that as bad as the June report was, it could prove to be the high-water mark for inflation.

“The June report will almost certainly mark the peak in inflation, as food and energy prices are set to fall sharply in next month's report,” Morningstar’s chief US economist Preston Caldwell says. “The uptick in inflation was driven heavily by food and energy prices, but indicators of food and energy prices have plummeted in July, which will show up in the next CPI report.

“It's still the case that the bulk of the inflation problem since the start of the pandemic has been driven by supply disruptions in autos, energy, and food,” he says. “We expect these issues to be resolved, contributing to an unwinding of the inflationary surge.”

For June, the Bureau of Labor Statistics reported that the Consumer Price Index rose a larger-than-expected 1.3% in June. Year over year, inflation was up 9.1% in June, the biggest increase since November 1981.

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“The June report did show signs of a broadening in inflationary pressures, as have the last several months,” Caldwell says. “This probably reflects a catch-up of pricing for businesses and industries which have lagged behind the overall inflation trend. However, the Fed has the opportunity to nip in the bud this broadening of inflation. Wage growth is running at moderate rates, so if the Fed continues with its course of tightening, we don't expect inflation in the broader economy to remain high.”

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For June, however, the news was pretty much all bad on the inflation front. While the jump in US inflation was widespread, the cost-of-living increases were concentrated right where it hurts consumers most: food, fuel, and shelter.

The report's “food at home” index rose 12.2% over the last 12 months, its largest increase since April 1979. The index reflecting “food away from home” rose 7.7% for the past year, the biggest increase since November 1981.

Excluding food and energy, the CPI rose 0.7% in June, and 5.9% over the last 12 months.
“Core prices, excluding food and energy, rose 0.7% month over month, 0.6% less than the overall index,” Caldwell notes. “This is still extremely high, representing a 9% annualized inflation rate, but there was probably a good deal of pass-through of higher fuel prices into core prices.”

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Underlying that jump in core prices was a rise in the cost for vehicles, along with an acceleration in shelter costs of 5.6% year over year.

On a month-to-month basis, the report’s rent index rose 0.8% in June, the biggest increase since April 1986.

“Shelter inflation responds with a lag to market prices, such as the Case-Shiller home price index, which have skyrocketed over the past year,” Caldwell says.

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Investors responded to the report by further increasing expectations for the pace of Fed rate hikes. Markets had already been looking for an aggressive increase in the federal-funds rate of three fourths of a percentage point to 2.25% at its July meeting. When the Fed raised rates by three fourths of a point in June, it was only the first time since 1994 that rates were raised by that amount in a single meeting. The funds rate started the year at zero.

Now, futures markets are suggesting the Fed could raise rates by a full percentage point in July. The Fed has not raised rates by that amount since it began using the fed- funds rate as a target when setting monetary policy under Alan Greenspan in the late 1980s, economists say.

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Caldwell thinks that given the drop in commodity prices, a 1-percentage-point tightening is unlikely.

However, “the Fed is likely to proceed with its expected 0.75% increase in the federal-funds rate in its July meeting,” Caldwell says. “Further increases are likely to bring the fed-funds rate up to 3% by the end of 2022. We expect news on inflation to improve through the end of the year, although the Fed will continue with its tightening until it feels victory over inflation is assured.”