WASHINGTON, D. C. – U.S. consumer prices soared at their fastest annual pace in nearly two decades last month, tightening the screws on Federal Reserve officials as they balance a stagflationary mix of rising unemployment, strained financial markets, and rising inflation. Even more worrisome for policymakers than the headline inflation jump may be signs that food and energy prices are starting to filter through the broader economy, as evidenced by sharp price gains last month in housing, transportation, and services.
Separately, a heat wave and the end of an auto sector strike gave a lift to U.S. industrial production in June, rising well above expectations.
The latest CPI data highlight the dilemma facing policymakers. In testimony before Congress Tuesday, Fed Chairman Ben Bernanke said the economy still faces "numerous difficulties" and getting back to normal financial market conditions is "a top priority" for the Fed, suggesting he's wary to raise interest rates anytime soon. Given that Mr. Bernanke signaled Tuesday that he expected some temporary rise in prices the data, for now, are unlikely to dislodge Wall Street expectations that policymakers will hold interest rates steady at next month's meeting. But if confirmed by upcoming reports, they could put rates hikes later this year back in play.
Prices of U.S. Treasury securities, which are sensitive to monetary policy expectations, tumbled following the release of the report.
Energy prices jumped 6.6% last month, according to Wednesday's report. Gasoline prices spiked 10.1% last month, and natural gas prices rose 4.9%. Food and beverage prices rose 0.7% on the month. Commodity prices soared 1.9% on the month, a record high. Medical care prices, meanwhile, increased a modest 0.2%, while clothing prices rose just 0.1%.
But medical care and clothing were about the only bright spots, as other non-food-and-energy components posted sharp gains, which could prove particularly worrisome to Mr. Bernanke, who said Tuesday that "the extent to which the high prices of oil and other raw materials have been passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited."
Housing, which accounts for 40% of the CPI index, was up 0.5%. Rent increased 0.4%. Owners' equivalent rent advanced 0.3%. With the housing market still in a severe downturn, "there's more relative demand for rental [housing], which is increasing prices for rent," Mr. Pandl said.
Services prices rose 0.5% last month.
Manufacturing of motor vehicles and parts rose 5.4% last month compared with May. It increased 0.6% the month prior. A strike at American Axle that started at the end of February and held down production in the sector for two months was settled in May.
Source: Wall Street Journal