Inflation Cracks 9% as Prices Continue to Accelerate Upward

Key Takeaways:

• Inflation surpassed the 9% barrier for the first time since 1981 and is showing little sign of abating, with the June Consumer Price Index (CPI) registering a 9.1% year-over-year increase.
• This spike in the inflation rate over the past 17 months—inflation was only 1.4% in January 2021—represents the worst acceleration in price increases over a similar time period since 1974.
• Inflation is eviscerating Americans’ paychecks, eroding 3.6% of their value over the past year and adding up to more than a $1,800 inflation tax since this inflationary episode began. Low-income workers and vulnerable senior citizens living on fixed incomes are particularly hurt by inflation.
• Consumer pessimism is on the rise, with the University of Michigan consumer sentiment index falling to record lows as Americans grapple with higher inflation and the prospects of a recession.
• New York Fed data indicates that inflation is becoming entrenched, with one-year-ahead inflation expectations rising in June to a new series high, even after accounting for Americans' views that house prices will decelerate in the face of rising interest rates and growing recession fears.
• Despite this bad economic news and defying basic economic wisdom, the Biden Administration continues to press forward with its tax hike agenda, which would add to current supply woes and push the economy further into stagflation territory.

Americans are used to contending with rising temperatures in the summertime, but the thermometer is not the only gauge registering a heat wave this summer. Inflation remains red hot, with the latest consumer price index (CPI) data coming in at 9.1% year-over-year, as shown in figure 1 above, which also reveals that producer price inflation remains in double-digit territory. This consumer price inflation reading is the first time in recent decades that consumer inflation has broken the 9% barrier and marks the highest increase since November 1981. However, unlike back then when inflation was receding, inflation now is continuing to rise. In fact, the surge in the inflation rate since January 2021—when it was only 1.4%—is the worst increase in prices over a comparable time period since 1974. The surge in gas prices weighs heavily on consumers, but ominously, the Bureau of Labor Statistics reveals that the rise in prices remains “broad-based.”

The inflation plaguing the U.S. economy is destroying the value of Americans’ paychecks at an ever-increasing rate, as shown in figure 2. Over the past year, paychecks have shrunk by 3.6% in value, and the loss of purchasing power Americans have experienced since this inflationary episode began amounts to more than a $1,800 inflation tax for the average worker—or over $3,600 for a dual-income family. Low-income workers and senior citizens living on fixed incomes are particularly hurt by the high inflation. In case high inflation were not bad enough, recession fears are also on the rise—and for good reason, with the Atlanta Fed GDPNow forecasting a second consecutive quarter of negative GDP growth.

It is, therefore, perhaps no surprise that consumer sentiment has plummeted in the face of these formidable economic headwinds, with the University of Michigan consumer sentiment index reaching its lowest ever value in June. Despite the Biden Administration spending over a year peddling various falsehoods on the current inflation crisis—such as the idea that inflation will quickly disappear on its own—recent data from the New York Fed indicates that Americans expect inflation to remain high over the next year. Besides being an indictment of the current administration’s failure to tame inflation (inflation it largely helped create), these deteriorating expectations indicate that inflation is becoming entrenched, which can make taming inflation all the more difficult.

Unfortunately, after failing to convince the public that inflation would go away on its own, the Biden Administration is proposing to take action by resurrecting its policy playbook of more spending and higher taxes—precisely the opposite prescription that the current stagflation conditions demand. After all, it was the passage of the American Rescue Plan Act in March 2021—which artificially stimulated demand through government spending while constraining supply by disincentivizing work—that kicked off the episode of high inflation that Americans have been contending with for more than a year. There’s a word for doing the same thing over and over again and expecting a different result—insanity. With the U.S. economy already potentially in a recession, the last thing Americans need is more government getting in the way.

Aaron Hedlund serves as Director of Research for the America First Policy Institute (AFPI).