Soaring costs drive inflation increases above expectations

Inflation in the U.S. is the highest in four decades and new numbers out Wednesday show no signs of letting up. The Labor Department reported consumer prices jumped 9.1 percent from last year. Gas prices, furniture, clothing, healthcare, groceries and cars also grew more expensive, while the core index rose 0.7 percent. Greg Ip of The Wall Street Journal joins Judy Woodruff to discuss.

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  • Judy Woodruff:

    Inflation in the U.S. is the highest its been in four decades, and new numbers out today give no reassurance it will let up soon.

    The Labor Department reported the consumer prices jumped 9.1 percent over last year, worse than economists had projected. Gas prices were up more than 11 percent in June. Furniture, clothing, health care, groceries and cars grew more expensive as well.

    Beyond increases in food and energy prices, the core inflation index rose 0.7 percent over the previous month.

    To break down what this means for the economy and the American people, I am joined by Greg Ip, chief economics commentator at The Wall Street Journal.

    Greg Ip, welcome back to the "NewsHour."

  • Greg Ip, The Wall Street Journal:

    Thanks for having me.

  • Judy Woodruff:

    So, not such good news. And it looks like this is across the board, that almost everything is getting more expensive?

  • Greg Ip:

    I think that is what was disappointing and surprising, is that there really was no good news in this report.

    I mean, obviously, the big increase came from energy and food. Gasoline, as everybody knows, has gotten a lot more expensive in recent months. That's what pushed us over the 9 percent level, the highest annual rate of inflation in over 40 years.

    Food was very expensive, like dairy products up like at least 1 percent, most food categories up over 10 percent in the last year. But when you dig below those sort of more volatile categories, it's troubling that even things that normally don't move around very much are also steadily moving up, like housing. The cost of shelter is up 6 percent.

    That's not just like renting an apartment, but it's also the way that the government measures the price of owning your own home. And the troubling thing about that is twofold. First of all, it's a very big chunk of the basket of goods and services that people buy, so it has a big effect on inflation.

    And the second is, it's very slow-moving and very kind of like a supertanker. Once that number starts going, it tends to, like, stick around for a long time. So that means it could be a while before inflation comes back down.

  • Judy Woodruff:

    Is it clear, Greg, what is driving these prices up, what the factors are behind this?

  • Greg Ip:

    So, I think, by this point, we can say there's a few things.

    First of all, clearly, the war in Ukraine has contributed both to higher energy prices and to higher food prices. But that's only a little bit of the story. The other part of the story is that the economy has recovered very, very rapidly from the COVID shutdown. Part of that was fueled by low interest rates and government stimulus.

    And the economy has never fully managed to get the supply side working again. There are people missing from the labor force. There are supply chains that have not basically reasserted themselves. We're still selling fewer cars than we did two years ago, because we still can't get enough parts.

  • Judy Woodruff:

    So there are some experts out there — and you have seen them — who are saying, well, we're getting close to a peak, that inflation is going to start to come down. Do you see a sign of that?

  • Greg Ip:

    Well, I was one of those people who said a few months ago that I thought we were close to a peak. And so I'm eating a little humble crow this afternoon. We're not at a peak yet.

    And, again, the troubling thing is that some of those volatile categories that we thought were temporary are, in fact, coming down. But other factors like housing are there for a while.

    Look, the thing that will ultimately bring us down, I think, is two things. First of all, with a bit of time, some of those supply-side problems, like with the cars, will correct themselves. But the bigger issue is that the Federal Reserve has to cool the economy down by raising interest rates.

    That's not a pleasant process. It usually means higher unemployment and slower growth and possibly a recession.

  • Judy Woodruff:

    And I want to ask you about that, because right now all eyes are on the Federal Reserve. Speculation they're going to need to raise interest rates, or they will raise interest rates even more than they had suggested they would.

    There is really no formula that's tried and true for the Fed, is there?

  • Greg Ip:

    Well, there is.

    For example, Paul Volcker, when he came into office 40 years ago, his formula was raise those interest rates until the economy keels over and inflation falls. It has a little bit of that feel, if not quite as bad as that.

    Look, even after several increases, the Federal Funds interest rates are still extremely low. There's talk that they will raise it at least a three-quarters-of-a-percentage point in a couple of weeks. Some people think they will raise it a full percentage point.

    But even if they do, the rate will still be below 3 percent, which is below the rate of inflation.

  • Judy Woodruff:

    Right.

  • Greg Ip:

    Everything we know tells us that rate has got to get above the rate of inflation to start slowing the economy down and acting on inflation.

  • Judy Woodruff:

    Is it clear which is worse, rising inflation or a recession?

    I mean, is it clear that a recession is to be avoided at all costs, or that higher inflation is to be avoided at all costs?

  • Greg Ip:

    Neither is very pleasant.

    (LAUGHTER)

  • Greg Ip:

    We have — American people have been through a lot of both in the last few years, and they don't really want either.

  • Judy Woodruff:

    Sure.

  • Greg Ip:

    But, look, from the Federal Reserve's point of view, the choice isn't inflation or recession. It's deal with inflation now, even if it involves a recession, or deal with it later, when inflation is higher and more entrenched and the recession will be even deeper.

    And let's not forget, recessions are hard on the people lose their jobs. But inflation is hard on everybody, those who lose their jobs and those who keep their jobs, especially those on lower incomes, which spend especially large shares of their budget on things like food and gasoline.

  • Judy Woodruff:

    So it sounds like you're saying whatever the Fed can do to get some kind of hold on inflation is going to be the priority.

  • Greg Ip:

    I think what we could say in the past is that, when inflation was always around 2 percent, and sometimes it was too low, the Fed had the luxury of doing everything it could to prevent recession and keep unemployment low.

    It doesn't have that luxury today. They don't want a recession. But if the only way to get inflation back down is to raise interest rates, slow demand and as a result have a recession, that seems to be a price that they are willing to pay. They're not happy about it, but they don't see a lot of alternatives.

  • Judy Woodruff:

    Sobering. Sobering. But we need to hear it.

    Greg Ip, thank you very much.

  • Greg Ip:

    Thank you, Judy.

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