Inflation accelerates and gas hits record $5: What else is driving prices and what the Fed will do | Univision money news

Another month has produced alarming inflation numbers. The CPI rose 1% from April and settled at 8.6% in the past 12 months through May. The readings put the Fed in a quandary and opened the door to a cycle of key rate increases that are more aggressive than the ongoing ones.

Fed officials and the consensus of economists take for granted a half-percentage point increase at next Wednesday’s meeting of the US Central Bank. It will follow a rise of a similar size approved in May, which was the strongest since 2000.

For July, however, some experts believe the Fed will decide on a more aggressive increase of three-quarters of a percentage point, or 0.75. Fed data shows that the last time it decided on an increase like that was in November 1994. It was the last – and most aggressive – of a series of increases that then-Fed Chairman Alan Greenspan, in that year, prevented the economy from overheating and inflation from stagnating.

The scenario in which the Fed will act at this time is different, both in the country and in the world.

The war in Ukraine affected supplies of some raw materials, including energy and food, two critical factors in inflation that in the United States reached its highest levels in 40 years in months. The COVID-19 pandemic continues to affect supply chains as well, particularly those originating in China.

Added to this are factors within the US that make it difficult to slow inflation and quickly return it to the usual range of 2% annually, including strong demand and a tight labor market that supports wages. The Fed itself believes it will take time for the price hike to get to this point: it has estimated that it will approach 3% by the end of next year and that it will be at that desirable level of 2% by the end of 2024.

Here we explain the factors that prevent inflation from capitulating.

Gasoline: its prices rose by 48.7% annually in May, and the gallon set a new record

They had been given a break in April, but resumed their ascent in May. Energy prices focus the largest increase in the price basket in recent times. For example, gasoline prices rose 4.1% in May compared to April and 48.7% in the twelve months ending in May.

And on Saturday, a gallon of gas set another record with an average of just over $5 nationally, according to the AAA Drivers Association, heralding higher prices during the summer.

The association said in an analysis, “The dynamics of declining gasoline supplies and increasing demand are driving prices at service stations higher. This combined with higher oil prices means that gasoline prices are likely to remain high in the near term.”

Housing: Some prices in this sector rose 5.5% y/y in May

What happens in this area is key, because the prices of what is known in English as “shelter” account for more than 30% of the basket of prices that make up the Consumer Price Index, which is the indicator that tells us how inflation is.

The real estate market has recorded tremendous progress in prices in general, especially the prices of homes and apartments sold and which in some cases end up with people renting. In places like Miami, the situation has been so steep that some rentals eat up 60% of what an individual earns per month.

An analyst at insurer ING explains that there is also a “lag effect” in this sector, which causes prices there to fall at a slower rate. “Leases usually only change once a year when they have to be renewed, so it takes time” to show a slowdown in their prices, James Knightley, ING’s chief international economist, says in a comment. For this reason, “it is likely that the housing components (within the CPI) will not decline any time soon,” he adds.

Shelter prices accelerated and rose 5.5% in the twelve months to May.

Food: Prices jumped 10.1% annually in May

This sector is also affected by the increasing demand from consumers in the country and problems with some supplies of raw materials such as wheat and sunflower due to the war in Ukraine. Ukraine and Russia are the main producers of these two raw materials.

In poorer households, this escalation is felt especially strongly, as they allocate a significant portion of their income to the purchase of food. A look at the Census Bureau’s survey of households across the United States helps understand this. Of the 35.1 million Hispanic households who responded to the survey in the week of April 27 to May 9, 6.7 million realized that sometimes or frequently they don’t have enough food on their tables.

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