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U.S. inflation reached a new 40-year high in June of 9.1%
WASHINGTON — U.S. inflation surged to a new four-decade high in June because of rising prices for gas, food and rent, squeezing household budgets and pressuring the Federal Reserve to raise interest rates more — trends that raise the risk of a recession.
The government's consumer price index soared 9.1 percent over the past year, the biggest yearly increase since 1981, with nearly half of the increase due to higher energy costs.
Inflation in the Midwest was worse than the national average, hitting 9.5 percent compared with a year ago. In a region that includes Iowa — as well as Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin — energy prices rose 44.5 percent, largely the result of gas prices. Food prices were up 11.9 percent.
“Folks, it’s out of control,” U.S. Sen. Joni Ernst of Iowa said during a Wednesday conference call with reporters, echoing concerns of Republicans critical of the Biden administration’s response. “Iowans are feeling the pinch in their pocketbooks. And yet, Democrats in Washington want to spend more and raise taxes on hardworking Americans and our small businesses.”
Democrats in Congress have said they hope to revive pieces of President Joe Biden’s social safety net spending package known as Build Back Better, which sputtered out in December. Experts say a new, downsized package could include roughly $1 trillion in new spending over a decade, about half the size of the initial spending package, with a focus on reducing health care and energy costs.
Experts and advocates disagree over whether the Build Back Better act will worsen inflation or help to quell it. Many Republicans argue that injecting more federal money into the economy will exacerbate inflationary pressures, while the White House and some Democrats say that the bill will reduce the cost of living for many low-income families and ease inflation long-term.
U.S. Sen. Chuck Grassley, R-Iowa, told reporters that inflation has been the top concern expressed at his town hall meetings.
“To combat inflation, we need more production, not less. And that’s particularly in the energy area, with gas taxes still being at their highest,” Grassley said. “I have to continue fighting any efforts to spend more money, which if we spend more money would pour gasoline on the fires of inflation. And I must continue pushing back against tax hikes that would trigger stagflation.”
Republican U.S. Rep. Ashley Hinson, of Marion, agreed, saying in a statement that “the last thing Iowans need right now is more spending and tax hikes from President Biden and Speaker (Nancy) Pelosi.”
For 72-year-old Marcia Freeman, who is retired and lives off of a pension, there is no escape from rising expenses.
"Everything goes up, including cheaper items like store brands," said Freeman, who visited a food bank near Atlanta this week to try and gain control of her grocery costs.
Accelerating inflation is a vexing problem for the Federal Reserve. The Fed already is engaged in the fastest series of interest rate hikes in three decades, which it hopes will cool inflation by tamping down borrowing and spending by consumers and businesses.
The U.S. economy shrank in the first three months of the year, and many analysts believe the trend continued in the second quarter.
"The Fed's rate hikes are doing what they are supposed to do, which is kill off demand," said Megan Greene, global chief economist at the Kroll Institute. "The trick is if they kill off too much and we get a recession."
The likelihood of larger rate hikes this year pushed stock indexes lower in Wednesday afternoon trading. The central bank is expected to raise its key short-term rate later this month by a hefty three-quarters of a point, as it did last month.
As consumers' confidence in the economy declines, so have Biden's approval ratings, posing a major political threat to Democrats in the November congressional elections — where Grassley and Hinson are among the Republicans running for re-election. Forty percent of adults said in a June AP-NORC poll that they thought tackling inflation should be a top government priority this year, up from just 14 percent who said so in December.
U.S. inflation erupted as consumers unleashed a wave of pent-up spending as the pandemic faded, spurred by vast federal aid, ultra-low borrowing costs and savings they had built up while hunkering down. As Americans channeled their purchases toward items for the home, like furniture, appliances and exercise equipment, supply chains became snarled and prices for goods soared. Russia's war against Ukraine further magnified energy and food prices.
In recent months, as pandemic fears have receded, consumer spending has gradually shifted away from goods and toward services. Yet rather than pulling down inflation by reducing goods prices, the cost of furniture, cars, and other items has kept rising, while restaurant costs, rents and other services are also getting more expensive.
Still, some economists have held out hope that inflation might be reaching a short-term peak. Gas prices, for example, have fallen from the $5 a gallon reached in mid-June to an average of $4.63 nationwide Wednesday — but still far higher than a year ago. Shipping costs and commodity prices have also begun to fall, and pay increases have slowed.
"While today's headline inflation reading is unacceptably high, it is also out-of-date," Biden said Wednesday. "All major economies are battling this COVID-related challenge."
The latest disappointing data on inflation came out at the outset of Biden's trip to the Middle East, where he will meet with officials from Saudi Arabian to discuss oil prices, among other subjects.
There have been signs that inflation was slowing before last summer and in April of this year, only for it to surge again.
"There may be some relief in the July numbers as commodity prices have come off the boil, at least but we are a very, very long way from inflation normalizing, and there is no tangible sign of downward momentum," said Eric Winograd, an economist at asset manager AB.
Some people are placing blame on companies for using inflation as a cover to raise prices beyond covering their own higher costs. But most economists say corporate price gouging is, at most, one of many causes of runaway inflation, and not the primary one.
Housing and rental costs are rising steadily as solid job gains encourage more Americans to move out on their own. Rents have risen 5.8 percent compared with a year ago, the most since 1986.
And the cost of many goods, such as furniture, still is increasing at a rapid pace, even as retailers such as Walmart and Target said they were overstocked and many analysts expected goods prices to decline. Furniture prices are up 13 percent from a year ago.
Grocery prices have jumped 12 percent compared with a year ago, the steepest such climb since 1979. The biggest shock has been energy prices, which soared 7.5 percent just from May to June. Gas prices have skyrocketed nearly 60 percent since a year ago.
Inflation is surging well beyond the United States, too, with 71 million people pushed into poverty in the three months after Russia invaded Ukraine, the U.N. Development Program said last week.
Tom Barton of The Gazette contributed to this report.