As the national average for a gallon of gas climbs toward $5, new government data to be released Friday is expected to show that inflation remained at a 40-year high in May.
Gas prices keep inflation at highest level in 40 years in May
“March inflation may have been the peak, but it’s likely to be a rocky peak,” said Joe Brusuelas, chief economist at RSM.
If anything, the stunning run-up in gas prices has become one of the most visceral ways people feel inflation in their daily lives. In some parts of the country, particularly on the West Coast, it’s becoming more common to drop $100 to fill up a gas tank. The national average has set a record every day since May 28, according to AAA, although prices are still below 2008 levels, when adjusted for inflation.
Rising gas prices, plus the cost of rent, airfare, groceries and practically everything else, have put pressure on the Biden administration and Federal Reserve to stabilize inflation.
The Biden administration has declared inflation its top economic priority and has taken steps to lower prices at the pump, by tapping the Strategic Petroleum Reserve and allowing blended biofuels to be sold. President Biden has largely blamed the surge on the Russian invasion in Ukraine, dubbing it “Putin’s price hike” that is spilling over into all sorts of sectors beyond energy and food, namely airfares.
“The fingerprints of that war and Russia’s choices are going to be all over the number,” one senior White House official said.
But for everyday drivers, gas prices act as a kind of billboard for the rising cost of living.
“We’re in uncharted territory,” said Patrick De Haan, head of petroleum analysis at GasBuddy. He added that “it’s not something that’s going to turn around anytime soon, I’m afraid.”
Most Americans expect inflation to get worse in the next year and are adjusting their spending habits in response to rising prices, according to a poll conducted by The Washington Post and George Mason University’s Schar School of Policy and Government. That kind of psychological toll is one of the reasons inflation has become a major political threat to Biden and congressional Democrats going into the midterms this year.
Friday’s data also comes amid growing fears of stunted economic growth worldwide. On Tuesday, the World Bank slashed its annual global growth forecast to 2.9 percent, from January’s 4.1 percent, and warned that the global economy may suffer from 1970s-style stagflation, a dangerous combination of weak growth and rising prices. And on Thursday, the European Central Bank announced it will raise interest rates at its July meeting by a quarter of a percentage point in its fight against inflation.
Much depends on whether the Federal Reserve manages to cool down the economy without acting so forcefully that it causes a recession. The Fed is on a path to raising interest rates seven times this year and will enact the third of those hikes coming next week. It is expected to raise rates by half a percentage point, similar to its May meeting, signaling aggressive moves are needed to keep inflation from becoming more persistent and entrenched in the economy.
There are some encouraging signs. Used-car prices — which made up a bulk of inflation for much of the past year — have fallen in recent months and are expected to continue dropping as semiconductor shortages improve. The red-hot housing market is also starting to cool, as a run-up in mortgage rates discourages aspiring buyers from competing for the few homes available.
There are also limits to what the Fed can do to curb rising prices. Interest rate hikes cannot boost oil supply, bring more people into the labor market or end a war. Energy prices around the world have been rising for months, a reflection of the continuing ripple effects from Russia’s ongoing war in Ukraine.
And though the Fed is in charge of controlling inflation, rising prices have soured Biden’s approval ratings for months and the White House has struggled to convince Americans that the economy is working for them.
At the same time inflation is so high, the labor market is unsustainably hot, with roughly two job openings for every person looking for work. The Fed’s goal is that higher interest rates can slow down hiring by making it more expensive for businesses to invest and hire.
In an interview with CNBC last week, Fed Vice Chair Lael Brainard made clear the central bank is a long way from seeing progress.
“I’m going to be looking for a consistent string of data on both the strength of demand, the labor market coming into better balance, and of course, importantly, a string of decelerating inflation data to feel more confident,” she said.
Source: WP
