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The price paid by American consumers soared in June to the highest level since 2008, surpassing all forecasts, and testing the Federal Reserve’s commitment to provide ultra-loose monetary support to the economy.

Data released by the US Department of Labor on Tuesday showed that the consumer price index rose by 0.9% in June, up 5.4% year-on-year. Excluding the volatile food and energy components, the so-called core CPI rose 4.5% from June 2020, the largest increase since November 1991.

The agency said that second-hand cars accounted for more than one-third of the increase in CPI. The main reason for the substantial increase was also the rebound in prices in categories related to the wider economic reopening, including hotel accommodation, Car rental, Clothing and air tickets.

Expectations that these growth will normalize help explain the Fed’s belief that inflation is temporary.

Michelle Meyer, head of U.S. economics at Bank of America, said: “Inflation rates rose sharply in June, but again due to sharp price increases in several categories.” “This strengthens the idea of ​​temporary inflation.”

However, in the bond market, some investors believe that these data have put more pressure on the Federal Reserve. The U.S. Treasury yield curve has flattened, as higher-than-expected readings encourage traders to bet that the central bank will tighten policy in early 2023.

John Ryding, chief economic adviser at Brean Capital, stated on Bloomberg TV that with regard to inflation, the Fed “we have been told that this story is temporary, but the growth rate is faster and lasts longer.” “Our monthly increase is about two times the expected rate. Times.”

The median forecast of a survey conducted by Bloomberg of economists shows that the overall CPI increased by 0.5% from the previous month and 4.9% year-on-year. The S&P 500 Index fell after the report was released.

The report may also increase the challenge for the Biden administration to allow Congress to approve trillions of dollars in additional fiscal expenditures in the next few years. Republicans have always emphasized that soaring inflation is a reason to reject such new plans.

A White House official said that the report is consistent with the government’s view that the surge in inflation is related to the economic bottleneck after the reopening.

Year-on-year data in recent months show that part of the reason is the so-called base effect—CPI fell from March to May last year during the pandemic lockdown. Although the annual data is expected to peak, it is not clear how much slowdown will occur in the coming months.

In the three months to June, the annual growth rate of core CPI exceeded 8%, the fastest since the early 1980s.

Household spending on goods, partly driven by government stimulus measures, has caused companies to scramble to complete orders in the face of material and labor shortages. This dynamic leads to higher costs, which usually affect consumer prices.

At the same time, the lifting of pandemic restrictions is driving the purchase of services such as travel and transportation, which is another factor in inflationary pressures.

The prices of new and used cars have risen by the largest increase on record from a month ago. In other words, these categories each account for less than 4% of the overall CPI.

The cost of food going out rose 0.7% month-on-month, the largest increase since 1981.

In Tuesday’s earnings report, companies such as PepsiCo and ConAgra Brands pointed out that their supply chains are facing cost pressures. Conagra has raised prices and said it will continue to do so-these price increases will ultimately help the company’s profit margins.

Federal Reserve Chairman Jerome Powell said that the recent price increase is the result of a temporary reopening effect, despite the recent acknowledgement of the possibility of long-term inflationary pressures. Continued restrictions on production channels and rising wages increase the risk of accelerating consumer inflation.

Economists have been observing whether price pressures will extend beyond the categories that have just rebounded after the lockdown related to the pandemic.

Housing costs are seen as a more structural component of the CPI, accounting for one-third of the overall index, rising 0.5% last month, the largest increase since October 2005. This growth was driven by a 7.9% increase in hotel accommodations.

Wage growth rose steadily in the second quarter, but rising consumer prices are causing losses. Another data released on Thursday showed that after inflation-adjusted average hourly wages fell by 2.9% a month ago, they fell by 1.7% in June.

Data released by the National Federation of Independent Businesses on Tuesday showed that 47% of small business owners reported higher sales prices in June, the highest percentage since 1981.

Consumers expect prices to rise in the near future. According to the New York Federal Reserve’s consumer expectations survey, the median inflation expectations for the coming year in June rose to a series high of 4.8%.

©2021 Bloomberg

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