By Anthony Marcus, for Eurasia Business News – June 10, 2022

View on a U.S. grocery store.

U.S. annual inflation hit record 8.6% in May, after reaching 8.3% in April, 8.5% in March and 7.9% in February. Continuing to accelerate higher, inflation is now out of control.

Most economists and analysts had expected that inflation had peaked in March at 8.5% and that it would decrease in the following months. This continuing increase is a serious problem for the U.S. economy. The middle and working class families are financially decimated right now.

Such a level of inflation was never seen in the United States since 1981 and the dynamic has been here for months. U.S. inflation already reached 7.5% in January after hitting 7% in December 2021, 6.8% in November and 6.2% in October.

In addition, the real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2021, real GDP increased 6.9 percent.

The U.S. Consumer Price Index for All Urban Consumers (CPI-U) increased 1.0 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported this morning. Over the last 12 months, the all items index increased 8.6 percent before seasonal adjustment. The increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors. After declining in April, the energy index rose 3.9 percent over May with the gasoline index rising 4.1 percent and the other major component indexes also increasing.

The food index rose 1.2 percent in May as the food at home index increased 1.4 percent. The index for all items less food and energy rose 0.6 percent in May, the same increase as in April. While almost all major components increased over the month, the largest contributors were the indexes for shelter, airline fares, used cars and trucks, and new vehicles. The indexes for medical care, household furnishings and operations, recreation, and apparel also increased in May.

The food index increased 10.1 percent for the 12-months ending May, the first increase of 10 percent or more since the period ending March 1981.

Food prices increase

The food index increased 1.2 percent in May following a 0.9-percent increase the prior month. The index for food at home rose 1.4 percent in May, the fifth consecutive increase of at least 1.0 percent. All six major grocery store food group indexes rose in May. The price index for dairy and related products rose 2.9 percent, its largest monthly increase since July 2007. The index for nonalcoholic beverages increased 1.7 percent, and the index for other food at home rose 1.6 percent.

The cereals and bakery products index increased 1.5 percent in May after rising 1.1 percent in April. The index for meats, poultry, fish, and eggs rose 1.1 percent over the month, with the index for eggs rising 5.0 percent. The index for fruits and vegetables rose 0.6 percent in May after declining in April.

The food away from home index rose 0.7 percent in May after rising 0.6 percent in April. The index for full service meals rose 0.8 percent over the month. The index for limited service meals increased 0.7 percent in May after rising 0.3 percent in April.

The food at home index rose 11.9 percent over the last 12 months, the largest 12-month increase since the period ending April 1979. All six major grocery store food group indexes increased over the span, with five of the six rising more than 10 percent. The index for meats, poultry, fish, and eggs increased the most, rising 14.2 percent, with the index for eggs increasing 32.2 percent. The remaining groups saw increases ranging from 8.2 percent (fruits and vegetables) to 12.6 percent (other food at home). The index for food away from home rose 7.4 percent over the last year, the largest 12-month change since the period ending November 1981. The index for full service meals rose 9.0 percent over the last 12 months, and the index for limited service meals rose 7.3 percent over the last year. The index for food at employee sites and schools fell 30.5 percent over the last 12 months, reflecting widespread free lunch programs.

Energy

The energy index increased 3.9 percent in May after falling 2.7 percent in April. The gasoline index rose 4.1 percent in May after declining in April. (Before seasonal adjustment, gasoline prices rose 7.8 percent in May.) The index for natural gas rose 8.0 percent in May, the largest monthly increase since October 2005. The electricity index also increased in May, rising 1.3 percent.

The energy index rose 34.6 percent over the past 12 months. The gasoline index increased 48.7 percent over the span. The index for fuel oil more than doubled, rising 106.7 percent; this represents the largest increase in the history of the series, which dates to 1935. The index for electricity rose 12.0 percent, the largest 12-month increase since the period ending August 2006. The index for natural gas increased 30.2 percent over the last 12 months, the largest such increase since the period ending July 2008.

All items less food and energy

The index for all items less food and energy rose 0.6 percent in May. The shelter index increased 0.6 percent in May, the largest monthly increase since March 2004. The rent index rose 0.6 percent over the month, the same increase as in April, and the owners’ equivalent rent index also rose 0.6 percent. The index for lodging away from home rose 0.9 percent in May after larger increases in recent months.

The index for airline fares continued to rise, increasing 12.6 percent in May after rising 18.6 percent the prior month. The index for used cars and trucks rose 1.8 percent in May after declining in each of the 3 prior months. The index for new vehicles rose in May, increasing 1.0 percent after rising 1.1 percent in April.

The medical care index rose 0.4 percent in May. Medical care component indexes were mixed over the month. The index for hospital services increased 0.5 percent, while the indexes for physicians’ services and for prescription drugs both declined 0.1 percent.

The index for household furnishings and operations continued to rise, increasing 0.4 percent over the month. The recreation index also rose 0.4 percent in May. Both increases were the same increases as in April. The index for apparel increased 0.7 percent in May after falling in April. Other indexes that increased in May include motor vehicle insurance (+0.5 percent), personal care (+0.4 percent), education (+0.3 percent), tobacco (+0.9 percent), and alcoholic beverages (+0.5 percent).

The index for all items less food and energy rose 6.0 percent over the past 12 months. The increase was broad-based, reflecting advances in almost all major component indexes. The shelter index rose 5.5 percent over the last year, the largest 12-month increase since the period ending February 1991. The index for household furnishings and operations increased 8.9 percent over the last 12 months. The index for new vehicles rose 12.6 percent and the index for used cars and trucks increased 16.1 percent over the year, while the index for airline fares rose 37.8 percent.

Not seasonally adjusted CPI measures

The Consumer Price Index for All Urban Consumers (CPI-U) increased 8.6 percent over the last 12 months to an index level of 292.296 (1982-84=100). For the month, the index increased 1.1 percent prior to seasonal adjustment.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 9.3 percent over the last 12 months to an index level of 288.022 (1982-84=100). For the month, the index rose 1.2 percent prior to seasonal adjustment.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 8.0 percent over the last 12 months. For the month, the index increased 1.0 percent on a not seasonally adjusted basis. Please note that the indexes for the past 10 to 12 months are subject to revision.

The U.S. Fed fueled inflation

Since the start of the coronavirus crisis in February-March 2020, the U.S. Federal Reserve has injected the markets with 120 billion US dollars in liquidity each month, through the purchase of 80 billion treasury bills and 40 billion MBS. To briefly say it, the Fed has printed 120 billion of US dollars each month for more than 18 months. High inflation is a logical consequence.

On March 16, 2022, amid annual inflation in February hitting 7.9%, never seen since January 1982, the Federal Reserve started to admit its mistakes and approved a 0.25 percentage point rate hike, the first increase since December 2018. This brings the federal funds rate now into a range of 0.25%-0.5%.[1] The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit.

By raising its rates, the Fed forces the banks to increase the rates they offer to their customers for the financing of a house, a car or any consumer good.

In a rare move, the U.S. Federal Reserve approved a 0.50% interest rate increase on May 4 and announced plans to shrink its $9 trillion asset portfolio starting next month, in an effort to tackle a 8.5% inflation in annual terms, a record since January 1982.

The moves, announced after a two-day policy meeting of central bankers Wednesday, will raise the Fed’s benchmark federal-funds rate to a target range between 0.75% and 1%.

Fed officials indicated the rate increases will come with slower economic growth this year. The Federal Open Market Committee also projected roughly six more rate hikes in 2022, along with slower growth and higher inflation.

The U.S. regulator pointed to necessity of further tightening its monetary policy. Jerome Powell, calling inflation in the U.S. “too high”, before denying its lasting character in Autumn 2021, said that the possibility of an equally significant rate hike will be considered at the next two meetings. It was also announced that on June 1, the reduction of assets on the Fed’s balance sheet, “inflated” during the easing period, will begin – within three months.

The U.S. central bank’s monetary committee is meeting next week, and markets are already expecting a 50 basis point turn of the screw on key interest rates, following a similar hike last month.

But given the soaring prices, more and more analysts are wondering if the U.S. central bank will tighten the screw more strongly by triggering a 75-point increase in key rates, an extremely rare step in the Fed’s recent history.

At a news conference last month, Mr. Powell said inflation had been too high. The central bank would need to be nimble but would also “strive to avoid adding uncertainty,” he said.

As of today, the Fed’s balance sheet stands at $8.2 trillion. Three-quarters of that increase, or $3 trillion, was created over a period of about 12 weeks last year.

It seems that the massive quantitative easing and the asset purchase program carried out by the Federal Reserve since 2008 have caused out-of-control inflation and that U.S. central bankers now fear the burst of the real estate and stocks bubbles they have created.

Gold prices up

Amid high inflation and real estate bubble, some investors invest in gold to protect their purchasing power. Gold prices have risen, hitting $1,878 per troy ounce, before stabilizing at $1,873 per troy ounce at closure on June 10, 2022 at 04:59 PM NY Time.

Read also : How to invest in gold

As high inflation is accelerating and the geopolitical tensions have been growing in Europe and Asia, already hit by high inflation and political tensions, gold prices have rallied buyers.

The yellow metal has always been a great hedge against inflation because it rises in price when the cost of living standards rises. Gold can store value efficiently, when paper currency loses purchasing power because of inflation. People need to protect their savings and wealth, to secure their family. Investing in gold can help them in time of high inflation.

Next publication of CPI

The Consumer Price Index for June 2022 is scheduled to be released on Wednesday, July 13, 2022 at 8:30 a.m. (ET).

The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers.

High inflation also hit Europe. The euro area annual inflation is expected to be 8.1% in May 2022, up from 7.4% in April according to a flash estimate released on May 31 by Eurostat, the statistical office of the European Union.

European stock markets experienced their worst session in a month on Friday and Wall Street widened its losses mid-session after this announcement of a further acceleration of inflation in the United States, which may push the U.S. Federal Reserve (Fed) to accelerate the rise in interest rates and thus slow the growth of the economy as well as that of corporate profits.

In Paris, the CAC 40 lost 2.69% (171.23 points) to 6187.23 points, its first close below 6,200 points in a month. In London, the FTSE 100 fell 2.12% and in Frankfurt, the Dax gave up 3.08%.

The EuroStoxx 50 index ended down 3.36%, the FTSEurofirst 300 by 2.66% and the Stoxx 600 by 2.69%.

The Dow Jones Industrial Average fell 880 points, or 2.7%, to 31392.79. Technology shares slid along with banks and consumer stocks, sending the S&P 500 down 116.96 points, or 2.9%, to 3900.86, and the Nasdaq Composite tumbling 414.20 points, or 3.5%, to 11340.02. All three indexes declined for a second-consecutive week, reported The Wall Street Journal.

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