Red flag for Biden and the Fed as US inflation soars to 41-year high

‘The Fed has committed to 0.5-percentage-point hikes in June and July, but it might need to do more’

INFLATION has hit a fresh 41-year high in the US, intensifying Joe Biden’s cost of living crisis and piling pressure on its central bank to raise interest rates more quickly despite the risk of causing a recession.

US prices were up 8.6pc in May compared with the same month a year earlier, accelerating from 8.3pc in April.

Food prices were up by more than 10pc on the year, according to the Bureau of Labour Statistics, while petrol was up by almost half. New vehicles cost one eighth more than they did in May 2021 and second-hand cars were up even more at 16.1pc.

The dollar rose 1.3pc against the euro and 1.6pc against the pound in anticipation of sharper interest rate rises, meaning the pound now buys $1.23.

Daniel Vernazza, economist at Unicredit, said the breadth of inflation beyond food and energy showed the carnage still being wrought in global supply chains. He said: “We suspect [rising core inflation] is due to supply bottlenecks, particularly in China during the past couple of months as well as from the Russia-ukraine conflict, and still strong demand for goods, as evident in the US retail sales figures.”

Core inflation will be particularly worrying to Jerome Powell, chairman of the Federal Reserve.

The Fed raised interest rates in March for the first time since 2018, from 0.25pc to 0.5pc. In May it followed up with a 0.5-percentage-point hike, the biggest jump since 2000.

Economist Silvia Dall’angelo, at Federated Hermes, said it means the Fed will have to go further than planned with rate rises in the coming months.

“The Fed has already committed to 0.5 percentage point hikes at its June and July meetings, but it might need to do more in subsequent meetings before it sees ‘clear and convincing’ signs inflation is cooling,” she said.

“Above all, the Fed’s credibility – the most powerful tool central banks have to affect inflation via expectations – is on the line. The Fed will likely resort to hawkish rhetoric and further frontloading of tightening, as signals they are resolute in their fight to inflation.”

Rapid rises in borrowing costs combined with slumping consumer confidence, which fell to a 50-year low according to the University of Michigan’s tracker, raise the risk of a recession in the US.

There is some demand to raise interest rates rapidly from 2pc to 2.5pc in September, said economist James Knightley, at ING, “but this risks moving policy deeply into restrictive territory and heightening the chances of a recession”.