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US inflation data knocks investors' risk appetite

posted onJune 10, 2022

Energy and food drove US inflation to a new four-decade high in May, the Department of Labour said Friday (June 10). Consumer prices surged 8.6% last month from 12 months earlier and compared to market forecasts of 8.3%.

The figure likely reaffirmed the market sentiment that the Federal Reserve will stick to the plan on future interest rate increases it signaled recently. By raising borrowing costs aggressively, the US central bank hopes to cool spending and growth enough to curb inflation without tipping the economy into a recession. It will be a difficult balancing act.

Energy prices rose 34.6%, the most since September of 2005, due to gasoline (48.7%), fuel oil (106.7%, the largest increase on record), electricity (12%, the largest 12-month increase since August 2006), and natural gas (30.2%, the most since July 2008).

The food index rose 10.1% over the prior year, the largest jump since March 1981. Big increases were seen in prices of meats, poultry, fish, and eggs (14.2%). Other increases were also seen in cost of shelter (5.5%, the most since February 1991), household furnishings and operations (8.9%), used cars and trucks (16.1%) and airline fares (37.8%) while cost of new vehicles eased slightly (12.6% vs 13.2%).

Meanwhile, core inflation rate slowed for a second month to 6%, compared to expectations of 5.9%

As the rising costs hit household purchasing power and prompt a pullback in spending, officials are warning that  the economy around the world is headed into a growth slowdown.

"The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid," World Bank President David Malpass said this week.

Also, the European Central Bank revealed that annual inflation projections will exceed March's forecast, reaching 6.8% in 2022.

Inflation has been a political headache for the White House. Surveys show that Americans see high inflation as the nation's top problem, and most disapprove of President Joe Biden's handling of the economy.

"Inflation is now at a 40-year high with little evidence that it has peaked," John Doyle, vice president of dealing and trading at Monex USA told Reuters.

U.S. stocks opened lower on Friday. The S&P 500 dropped 1.5% shortly after the opening bell. The Dow Jones Industrial Average fell 1.5%, and the Nasdaq Composite declined 1.8%.

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