As inflation hits 40-year high of 8.6%, experts look ahead

By Doug Bailey

The US said Friday the Consumer Price Index, the measure of the average change over time in prices paid by urban consumers for a market basket of goods and services, rose to 8.6%, a level not seen since Ronald Regan was president and Michael Jackson was singing “Billie Jean.”

The CPI ballooned to 8.6% from a year ago, showing that price pressures have become ingrained in the economy and might be for some time. The inflation rate was up a whole percentage point from a month ago, an amount that well exceeded estimates and sent the stock markets spiraling. The core CPI, which takes out the more volatile food and energy components, rose just 0.6% from May but was nevertheless up 6% from a year ago, which also outpaced expectations.

Energy, food, housing costs cited

Energy prices, particularly record-breaking gas costs, as well as food and housing expenses were the main culprits, leading most economists to believe the Federal Reserve will move even more aggressively to try and tame the trend. Some say the results portend a looming recession, something that also happened 40 years ago when the inflation rate was this high.

“I do still think it's reasonable to say that the base effects of inflation are near the peak,” said Eric Merlis, co-head of global markets at Citizens Bank. “Now, whether it's June, July, or August, I can't tell you. But if I'm trying to pick up the big, broader picture, three months won’t change the trajectory of a [Fed] policy.”

Fed rate increase possible next week

The Federal Open Market Committee (FOMC) has already indicated it may raise rates another half-point when it meets next week. The Fed is also plans to update its Summary of Economic Projections, which will show where policymakers see inflation, unemployment, growth and borrowing costs heading over the next two years. Another half-point rise could come next month and after that is anybody’s guessed.

“It’s possible we’ll see a more aggressive move in the September meeting, but it’s hard to tell right now,” he said.

Merlis tends to look closely at an economic factor called “owners’ equivalent rent,” (OER) which measures how much money a property owner would have to pay in rent to be equivalent to their cost of ownership. With home prices appreciating year after year, it applied upward pressure on prices. He believes it may begin to subside.

Home prices may be bellwether

“I would look and see if home price acceleration slows down in the coming months,” Merlis said. “Then you would most likely see other components slow down, as it would have a downward pressure on prices.”

Still, energy prices are spiraling, and those costs also feed through to the prices of all goods and services, he said.

“Something I like to point out to clients is that inflation, from some perspectives, is good,” said Andrew Gold, a financial advisor and educator who helps run investment strategy for Prestige Wealth Management, in Dallas. “It means we have a growing economy, increasing wages, and good access to everything we need. That said, when it increases at a rate faster than wages it does have an increased negative effect especially on the lower and middle class who pay the brunt of it, which is why it is a major concern right now.”

Until we see a relaxation in housing, food, and energy prices, few consumers would agree inflation is as good thing.

"There's little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy," said Sal Guatieri, senior economist with BMO Capital Markets.

Facing 'big structural issues'

“Unfortunately, the ugly inflation won’t pass over us like a summer storm. We’re facing some big structural issues that may take time to fix," said Paul Tyler, CMO at Nassau Financial Group, an insurance company headquartered in Hartford, Conn.

"First, understand that it’s a global, not just an American issue," Tyler said. "Central banks around the world kept businesses working during COVID by pumping enormous amounts of cash in the economy. The banks now need to slowly take it out by cautiously raising interest rates before inflation runs out of control. This hasn’t been easy task, so far."

"Second, we benefitted from deflationary trends because China produced more goods at lower prices for us each year," he said. "That engine is now grinding to a halt."

"Finally, the war in Ukraine not only is pushing fuel prices higher, but also adding even more hidden costs to our fuel bills," said Tyler.

"To get inflation under control, we need the war to end, U.S. oil producers to put our wells back into production, and the interest rate hikes to engineer a soft landing for our economy,” he said.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].