Another Hot Inflation Report Keeps Pressure on the Fed

July 14, 2022

Another big jump in consumer prices last month has investors weighing the possibility that the Federal Reserve will raise interest rates by a full percentage point later this month, something it has not done in decades. 

The consumer price index (CPI) reading for June showed prices were 9.1% higher than a year earlier, according to the Labor Department. That is the largest increase since November 1981. It also marks an acceleration from May’s 8.6% annual increase.

A sharp increase in gasoline prices, which jumped 11.2% from the month before and nearly 60% from a year prior, drove much of the increase, but higher prices for shelter and food were also major contributors. 

The so-called “core” CPI, which excludes volatile categories like food and energy, increased by 5.9% in June from a year earlier, down slightly from May’s 6% gain. However, on a month-to-month basis, core prices rose 0.7% in June, an acceleration from a 0.6% increase in May, which some economists argue is a sign of inflationary pressures broadening to other facets of the economy.

Economists say the latest inflation report puts additional pressure on the Fed to continue big rate rises for a longer period, boosting the risks of a recession over the next year.

Fed officials had previously signaled that they would raise rates by another 0.5 or 0.75 percentage points in July following a 0.75 increase last month. Now, traders are betting that they will be even more aggressive. 

The probability of a one percentage point increase has jumped to around 79%, up from around 12% before the latest inflation report, according to the CME Group.

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