Welcome to our Hot Inflation Summer.
Beer, beef, and bikini prices are rising just as our paychecks are shrinking, according to two government reports released June 10.
Plus the cost of borrowing money — the interest rates we shell out for credit cards, auto loans, and even mortgages — is unlikely to drop in the coming months.
The Federal Reserve is widely expected to keep interest rates on hold as policymakers wait to see the additional collateral damage on the U.S. economy from the Iran war.
The May Consumer Price Index accelerated to the fastest pace since early 2023, climbing 0.5% from April and 4.2% from a year earlier, the Bureau of Labor Statistics reported.
And in a separate release, the BLS saidreal average hourly earnings fell 0.7% in May from a year earlier, the biggest drop in more than three years.
Why? The Iran war’s energy-price spike outstripped pay gains.
Fed expected to hold rates steady at June meeting
Even if the war ends soon, economists expect additional price increases in the near future, which could, as I’ve reported, prompt Fed officials to hike the benchmark Federal Funds Rate later this year.
This isn’t the economic landscape Kevin Warshexpected to face at his first Federal Open Market Committee meeting June 16-17 as Fed Chair.
The U.S. central bank was widely expected to make up to two quarter-point rate cuts in 2026 at the beginning of this year.
Not now.
Jeffrey Roach, chief economist for LPL Financial, told TheStreet in an email that if the Strait of Hormuz remains disrupted through Labor Day weekend, “we would expect the energy shock to affect additional sectors and heighten uncertainty about the future path” of monetary policy.
“Rate expectations could be further upended if this crisis lasts throughout the summer,’’ Roach said. “For next week, expect the Fed to remain on hold while removing any bias toward additional easing.”
FRED Economic Data/TheStreet
Fed’s dual mandate for inflation, jobs requires a tricky balance
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
- Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
- Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.
Labor market shifts influence Fed rate-cut bets
The unexpectedly strong May jobs report delivered an upside surprise for payroll growth and the unemployment rate held steady at 4.3%.
The FOMC continued to hold the funds rate, which impacts the cost of short-term borrowing, steady at 3.50% to 3.75% during its April 30 meeting.
This came after policymakers cut rates by a quarter point at each of its last three meetings of 2025 to shore up the softening labor market.
Related: Inflation drives rate-cut debate at Warsh’s first Fed meeting
In the weeks since the April FOMC meeting, multiple Fed officials have expressed concern about the upside risk to the inflation side of the mandate and pivoted to a more hawkish outlook, which could result in a more restrictive policy in the coming months.
The CME Group FedWatch Tool predicts a near 100% chance the FOMC holds rates steady this month. Futures traders have begun penciling in a quarter-point cut in December.
White House pushes Fed rate-cut messages
As I’ve reported, President Donald Trump and other White House officials have repeatedly called for the Fed to slash rates dramatically to 1% or lower, mainly to reduce the amount of interest on the nation’s $38.91 trillion debt.
“The numbers were great,” the president said about the CPI data during a June 10 bill signing at the White House, adding that he expected the economic fallout from the Iran War to have been worse.
The president told NBC News in a June 5 interview that while he wants Warsh “to do whatever he wants” to monetary policy, he also warned that “there’s no reason to raise interest rates.”
CPI backlash impacts Fed rate-cut bets
Phil Camporeale, chief investment strategist at J.P. Morgan Wealth Management, said in an email to TheStreet that the muted reaction in Treasury rates after the CPI report — which came in as expected — “validates that this is a supply-driven inflation shock versus an overheating demand-driven economy.”
“We believe this is more indicative of a Fed on hold versus tightening,’’ Camporeale said. “Our expectation is that energy prices will peak in Q2, limiting the impact on core prices in the second half of the year.’’
But the combination of higher prices and weaker pay gains is putting more stress on household budgets at a time when consumer sentiment is already at record lows, according to Bloomberg.
“The longer the Middle East conflict persists, the broader and more persistent inflationary pressures are likely to become,” EY-Parthenon Chief Economist Gregory Daco said in a note to Bloomberg.
“Higher fertilizer prices will place upward pressure on food inflation, while rising transportation and production costs gradually pass through to a wider range of goods and services,’’ Daco wrote.
Related: White House sends blunt message to Warsh as Fed rate fears rise