US Inflation Jumps to 8.6 Percent, Highest in 40 Years

Analysts now predict aggressive Fed response and a bigger economic slowdown
By Andrew Moran
Andrew Moran
Andrew Moran
Andrew Moran covers business, economics, and finance. He has been a writer and reporter for more than a decade in Toronto, with bylines on Liberty Nation, Digital Journal, and Career Addict. He is also the author of "The War on Cash."
June 10, 2022 Updated: June 13, 2022

The U.S. annual inflation rate surged to 8.6 percent in May, topping the market estimate of 8.3 percent.

According to data from the Bureau of Labor Statistics (BLS), the consumer price index (CPI) rose by 1 percent on a month-over-month basis. Key drivers of inflation, such as food, energy, and housing, showed no signs of slowing last month.

The core inflation rate, which excludes the volatile food and energy sectors, climbed by 6 percent year-over-year, higher than economists’ expectations of 5.9 percent. Core inflation jumped by 0.6 percent month-over-month.

All the inflation indexes ran high in May, with food prices soaring by 10.1 percent and energy increasing by 34.6 percent.

Fuel oil surged by 106.7 percent, gasoline rose by 48.7 percent, and electricity costs jumped by 12 percent year-over-year.

In May, meat prices remained expensive as beef (10.2 percent), pork (13.3 percent), ham (11.1 percent), and chicken (17.4 percent) have all surged.

Eggs spiked by 32.2 percent, while milk advanced by 15.9 percent. Fruits and vegetables increased by 8.2 percent, and coffee rose at a remarkable pace of 15.3 percent.

Shelter costs swelled by 5.5 percent. Airline fares increased by 37.8 percent as a result of increasing fuel prices and high travel demand.

New vehicles jumped by 12.6 percent, while used cars and trucks rose by 16.1 percent. Apparel prices swelled by 5 percent.

U.S. financial markets reacted negatively to the inflation data. The Dow Jones Industrial Average fell by nearly 700 points and the Nasdaq Composite Index tumbled by more than 3 percent. The S&P 500 dropped by about 2.7 percent.

The yield on two-year U.S. Treasury notes increased by more than 17 basis points to 3 percent, reaching its highest level since June 2008.

This is “signaling that investors now expect that the Fed will have to raise the federal funds rate by another 200bps over the next 12 months,” Ed Yardeni, president of Yardeni Research, said in an email to clients.

“The 10-year yield remained around 3.10 percent, suggesting that the yield curve is anticipating a significant economic slowdown, which will lower inflation.”

The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, surged by 0.8 percent to 104.02, from an opening of 103.34.

Where’s Inflation Heading?

One of the hot topics in recent weeks has been whether or not inflation has peaked.

Over the past couple of months, some components of the U.S. marketplace have eased, particularly used car prices. However, as the May CPI report shows, many goods and services have continued to increase in cost, especially on the energy front.

The persistent jumps in a broad array of energy commodities, including crude oil, natural gas, gasoline, and diesel, could send the CPI higher in the coming months.

Mohamed El-Erian, a top economist and chief economic adviser at Allianz, has been skeptical of claims that inflation has reached a peak.

He reiterated this stance on June 10, noting that the June month-on-month headline reading could be worse than the May report.

“Amplifying the economic/social/political discomfort, headline is a new high for this inflation cycle,” he wrote on Twitter. “Also, if the first 10 days of June are anything to go by, the next monthly measure would be higher.”

He also suggested that the bond market’s reaction to U.S. inflation data points to a more aggressive Fed response and a bigger economic downturn.

Over the past month, West Texas Intermediate (WTI) and Brent crude prices have advanced by about 10 percent. Natural gas soared by 16 percent. The national average for a gallon of gasoline is nearly $5, while diesel is homing in on $6, data from AAA show.

Moving forward, inflation will need energy prices to take a breather, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“For inflation to ease persistently, we need to see energy prices soften,” she said in a June 10 research note.

Euro Pacific Capital Chief Economist and Strategist Peter Schiff rejected the premise that the United States is at peak inflation, telling Fox Business that “inflation is going to get much worse.”

“This inflation is just getting started. I mean, we’ve had it for a long time in financial assets, but now it’s finally moved into consumer goods and it’s got a long way to go,” Schiff said.

Other U.S. policymakers are waiting for more data to determine if the economy has seen the worst of higher prices or if inflationary pressures will subside.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, told CNBC last week that she hasn’t seen enough evidence to suggest that inflation has peaked.

“I don’t want to declare victory on inflation before I see really compelling evidence that our actions are beginning to do the work,” Mester said.

The rate-setting Federal Open Market Committee (FOMC) will hold its two-day June policy meeting on June 14 and 15. According to the CME Group FedWatch tool, it’s widely expected that the U.S. central bank will pull the trigger on a 50-basis-point interest rate hike.

During a Senate Finance Committee hearing on June 8, Treasury Secretary Janet Yellen said the United States would endure “unacceptable levels of inflation” for some time, although she “very much hopes that it will be coming down now.”

In separate testimony in front of the House Ways and Means Committee hearing, Yellen said she “probably could have used a better term than transitory” when discussing inflation.

‘Nowhere to Hide’

U.S. families are paying an average of $311 more per month for goods and services, according to recent estimates from Moody’s Analytics.

Last month, a CNBC + Acorns Invest in You survey, conducted by Momentive, showed that many consumers are cutting back on dining out, reducing their driving, canceling a trip, and ending monthly subscriptions.

Because inflation is broad-based, post-pandemic economic conditions have “left consumers nowhere to hide,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.

“The biggest increases are coming in categories that are absolute necessities—shelter, food, and energy,” McBride told The Epoch Times. “This is why we’re beginning to see signs of strain among consumers that are dialing back discretionary spending or looking to economize as much as possible.”

The best strategy that consumers and investors could employ, particularly in a stagflation environment, is turning to gold and silver, according to William Stack, a financial adviser at Stack Financial Services.

According to Stack, these precious metals are some of the top-performing assets amid stagflation.

Although silver has tumbled by about 7 percent year-to-date, gold has held steady with a gain of nearly 1 percent. Both metal commodities have outperformed the leading U.S. benchmark indexes.

“Historically, gold and silver have continued to do well even in the years immediately following stagflationary periods, increasing 5 to 8 times in price over a 3-to-5-year period,” Stack told The Epoch Times.

“Conditions appear to be similar in many ways and more extreme in some ways. We recommend clients and retirees protect themselves by owning insured equity-linked accounts that protect their principal from market declines while allowing the earnings potential to keep up with inflation and saving a portion (10 to 20 percent) of their savings in precious metals as well.”

According to the Federal Reserve Bank of New York’s (FRBNY) monthly Survey of Consumer Expectations, one-year median inflation expectations tumbled to 6.3 percent in April, down from 6.6 percent in March.

Andrew Moran
Andrew Moran covers business, economics, and finance. He has been a writer and reporter for more than a decade in Toronto, with bylines on Liberty Nation, Digital Journal, and Career Addict. He is also the author of "The War on Cash."