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MAY INFLATION SETS ANOTHER 40-YEAR RECORD
The U.S. annual inflation rate in May edged up to 8.6 percent from 8.5 in April, squelching some analysts’ predictions that inflation had peaked.
The pace of rising prices was the greatest since December 1981.
Grocery prices climbed 11.9 percent year over year last month, their largest annual gain since 1979, The Wall Street Journal reported. Grocery bills have added at least 10 percent each month this year.
Prices for used vehicles grew by 1.8 percent in May from the month before, reversing three consecutive months of declines.
The cost of housing grew 5.5 percent from a year earlier. Airline fares notched their third straight month of double-digit gains, adding 12.6 percent in May alone.
Energy prices soared at an annual rate of 34.6 percent in May, helping to spread inflation throughout the economy.
Russia’s invasion of Ukraine and resulting Western sanctions continued to push up fossil fuel costs, with a gallon of unleaded gasoline averaging $5.01 on 13 June, according to the American Automobile Association.
“We suspect the formidable momentum in inflation could push the Consumer Price Index close to 9 percent as early as next month,” Sara House, Wells Fargo Securities’ senior economist, told the WSJ, adding that inflation likely will remain that high into the fall.
Persistently higher energy costs and rising service prices, such as for airline tickets, will keep inflation’s rate in its current neighborhood through the summer, the Financial Times said.
On 10 June, president Joe Biden laid the blame for high oil and gasoline prices on Russia’s war in Ukraine.
“Prices at the pump are a major part of inflation, and the war in Ukraine is a major cause of that,” he said in a public appearance.
He has not acknowledged that Western sanctions against Russia also contribute to inflation.
The University of Michigan’s monthly survey of consumer sentiment plunged from 58.4 in May to 50.2 this month, its lowest point on record. Half those surveyed said inflation was their chief cause of gloom; the prospect for long-term inflation rated its highest in the survey since 2008.
The U.S. Federal Reserve’s artificially low interest rates and $120-billion monthly bond-buying campaign during the COVID War, coupled with government stimulus spending, poured money into the economy that fueled a consumer spending spree when COVID restrictions were lifted.
Supply chain tangles and a lag in mining and manufacturing made goods scarce, lighting inflation’s fuse.
The Fed and other policy makers were caught off-guard and failed to raise interest rates high enough fast enough to tackle inflation.
May’s inflation rate pressures the Fed’s rate-setting committee to raise its base interest rate higher than the 0.50 percent the central bank has signaled. (See “Fed May Raise Interest Rate More Than Planned” in this issue.)
However, a stiffer hike could slow the already-precarious economy and tee up a recession, analysts have said.
TREND FORECAST: As we have said repeatedly, the Fed will not raise interest rates high enough fast enough to challenge inflation, because to do so would be to send the economy into a severe recession.
Inflation will continue until consumers run out of their ability to spend or until a recession sets in, whichever comes first.
And, there is another reality. With markets already tanking and sectors such as real estate slowing, should the GDP have a sharp downturn next quarter, the Fed may ease up on its rate hikes.
SOARING GRAIN PRICES POSE DILEMMA FOR WESTERN ALLIES
Faced with a mounting global grain shortage and skyrocketing prices, the Biden administration is mulling lifting sanctions on Belarus’s potash industry for six months and urging European allies to open a rail corridor for the country’s potash exports.
Potash, a key ingredient in fertilizer, has seen its price more than double since Western allies extended their sanctions against Russia to include Belarus, a close ally of Russian president Vladimir Putin, as we reported in “Potash Prices Skyrocket” (7 Jun 2022).
Proponents in the Biden administration argue that the offer could persuade Belarus dictator Alexander Lukashenko to open a similar corridor that would permit Ukraine to export grains and other crops.
However, it is unclear whether U.S. allies united against Russia’s war would support any relaxation of sanctions.
The idea is unlikely to work also because of Lukashenko’s close ties with Putin, critics within the White House say.
At the same time, the National Security Council sees the move as one of the only ways to ease the global food crisis, according to The Wall Street Journal.
Also, Ukraine needs to rid itself of overflowing grain stockpiles to make room for whatever can be harvested this year.
Together, Russia and Ukraine supply almost a third of the world’s wheat exports, a quarter of global barley shipments, and 80 percent of sunflower oil. Ukraine’s shipments have been slashed by at least half because of Russia’s attack and most of Russia’s halted by Western sanctions.
Ukraine has accused Russia of stealing its grain from occupied areas and selling on world markets disguised as shipments from Ukraine.
The U.S. state department has agreed with the allegations and is urging world governments not to allow imports of any such shipments.
On 6 June, Russia and Turkey reportedly discussed opening a Black Sea channel that would allow exports of Ukraine’s grain, but Ukraine’s government was not privy to the discussion, the WSJ said.
No such agreement exists, the Kremlin said, and once again demanded that Ukraine remove mines from the port of Odessa.
TREND FORECAST: Although Western sanctions are worsening the world’s food crisis, the Biden administration will not publicly admit it, despite working quietly to make loopholes in the sanctions for some essentials to make it through the blockade.
As the food crisis becomes more acute, nations facing hunger and economic damage from higher food prices will pressure the allies to soften sanctions or lift them entirely, even briefly.
The longer the sanctions remain in place, the greater the probability that some Western allies will peel off and offer a channel for banned goods to flow, especially if social and political turmoil strengthens in affected countries.