Inflation Hits New Four-Decade High of 9.1%

Grocery inflation reached a new high of 15.1%, with consumers spending more at dollar stores.

July 14, 2022

US Dollar Bill Inflated

ALEXANDRIA, Va.—U.S. consumer inflation rose to 9.1% last month—the quickest increase since November 1981, reports the Wall Street Journal. The price of gas, which was up 11.2% from the previous month and nearly 60% from a year earlier, was behind much of the increase, while housing and food prices also played a large role.

Grocery inflation reached a new high of +15.1%—more than doubling since the beginning of the year, reports Numerator. Grocery categories most impacted included frozen meat (+28%), chips (+26%), poultry (+25%), water (+22%) and milk and milk substitutes (+17%). Beverages are the most impacted department in the grocery sector. Among the top-selling categories in the grocery sector, five beverage categories rank in the top 10 for highest inflation rates.

On a month-to-month basis, core prices were up 5.9% in June, slightly less than May’s 6.0% increase. On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May.

With investors’ expectations of a worldwide economic slowdown, commodity prices have decreased in recent weeks, including for oil, copper, wheat and corn. Prices for these rose sharply after the war in Ukraine began.

“There’s a pretty serious recession fear affecting a broad range of asset prices,” Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, told the Journal.

Investors and economic analysts are debating whether the Federal Reserve will raise interest rates by a full percentage point instead of 0.75% later this month. The Fed is set on getting inflation under control, but raising interest rates also increases a recession risk. Fed Chairman Jerome Powell said the central bank wants to see clear evidence that price pressures are diminishing before slowing or suspending rate increases.

Numerator reports that spending remains elevated, but there are signs of softening demand. In-store spending is at a 2022 high of +24%, with club and dollar-store channels seeing the largest gains, at +15% and +14% in spend, respectively. Shoppers are increasing trips by 4%, and spend per trip by 9%, Numerator finds. High income shoppers show the largest increase in spend at +33%.

Changes in Rent and Wages

According to the Labor Department, housing increased 0.6% from May to June, and the rent index rose 0.8% month over month, which was the largest monthly increase since April 1986. The Journal reports that it’s important to note housing inflation, as it represents around 40% of core CPI and around 17% of the Fed’s preferred inflation gauge.

“High rents are really troubling because they’re locked in once every year or once every two years, and that’s what leads people to go ask their boss for higher wages,” Lara Rhame, chief U.S. economist for FS Investments, told the Journal.

Annual wage growth is at 5.1%, so wages are not keeping up with inflation. Average hourly earnings adjusted for inflation are declining at their fastest pace in four decades. Once seasonal and inflation adjustments are added, average hourly earnings decreased 3.6% from June 2021 to June 2022.

Some employers are giving out bonuses or increasing salaries midyear to keep employees amid a tight labor market. Companies have doled out 3% annual pay increases on average for years, but employee retention has been a large driver in paying people more.

“A labor shortage plus inflation makes up that perfect storm where we’re seeing larger than historical annual base salary increases and companies thinking about doing something more,” Rebecca Toman, vice president at Pearl Meyer, a compensation advisory firm, told the Journal.

Pay raises and bonuses are hitting employees at a time when more Americans are dipping into their savings. The personal savings rate was at 5.4% in May, which is below the average of the last decade and is below the record of 34% in April 2020.

Numerator reports that as of early July 2022, 23.6% of consumers claimed they did not have spare cash, a trend driven by rural, Gen Z and low-income households. Also, financial optimism was at an all-time low in early July. Less than half (47.4%) of consumers rated their financial situation as “good” or “very good,” down from 56.2% of consumers in July 2021.

However, travel intentions are up after leveling off in May 2022. Twenty-seven percent of consumers said they would use extra funds for vacations and travel, a trend driven by high income, Gen X and rural households.