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Rising US inflation adds to pressure on Fed

Interest rate hikes expected in June, July as analysts warn of economic recession

Shoppers shop at a retail store in Niles, US on Feb 19, 2022. (NAM Y. HUH, FILE / AP)

The latest US inflation numbers have come in high again, and the Federal Reserve Bank, which is forecast to raise interest rates this week, appears to be playing catch-up.

The central bank's Federal Open Market Committee will convene for a two-day meeting on Tuesday, after which it is expected to raise the federal funds rate by 0.5 percent, or 50 basis points, putting the benchmark at about 1.5 percent.

A further hike is expected in July, too. Analysts say this likely will be another 50 basis points, although some economists, at Barclays and Jefferies, have speculated it could rise 75 basis points.

Dean Croushore, who was an economist at the Fed's Philadelphia regional bank for 14 years, told the Financial Times that the Fed may have to raise its key rate to 5 percent because it had waited "far too long" to act.

"It's always tough to bring inflation down once you let it out of the bottle," said Croushore, who now teaches at the University of Richmond, Virginia. "If they would just accelerate the rate increases a little bit more, it might cause a little financial volatility in the short run, but they might be better off by not having to do as much later."

On Friday, data from the US Bureau of Labor Statistics showed that the consumer price index had risen by 8.6 percent in May compared with a year ago, the largest annual increase since December 1981. The CPI was up by 8.3 percent in April, slightly lower than a 40-year high of 8.5 percent in March.

Economists had expected inflation to rise 8.2 percent in May, and for core inflation-which excludes food and energy-to slow further.

Energy and food prices rose significantly in the latest reading. The energy index jumped by 34.6 percent, the largest 12-month increase since September 2005. Meanwhile, the price of milk increased by 15.9 percent, chicken by 17.4 percent, and eggs by 32.2 percent.

"I've become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession," Bruce Kasman, chief economist at JPMorgan Chase& Co, told Bloomberg.

In a new survey by the Financial Times and the Initiative on Global Markets at the University of Chicago's Booth School of Business, 70 percent of the leading academic economists polled said they see the US entering a recession next year.

Nearly 40 percent of respondents also expect inflation to persist if the Fed doesn't raise interest rates to 2.8 percent by year-end.

"Policy rate hikes will need to be relentlessly aggressive until inflation finally starts to fade, even if the economy is struggling," Seema Shah, chief strategist at Principal Global Investors, said in a note quoted by Yahoo Finance.

The personal consumption expenditures price index, the Fed's preferred gauge of inflation, jumped by 6.3 percent in April, more than three times the bank's target level of 2 percent.

"The (stock) market wants some clear and convincing evidence that the Fed can pull this off without starting a recession," Lori Calvasina, head of US equity strategy at RBC Capital Markets, told CNBC.

Mohamed El-Erian, the chief economic adviser at Allianz, said on Sunday that he believes inflation will worsen. He said that in a period of stagflation-low economic growth coupled with high prices-inflation can reach 9 percent.

He also noted the effect that inflation has on vulnerable communities.

"This inflation is hurting all Americans, and it's hurting the poor particularly hard, that we know for sure," El-Erian said. "Second, the longer it lasts, the more it's going to create demand destruction, meaning that the average American not only gets hit by higher prices but they will start worrying about their income."

One area where many working US citizens are experiencing economic stress is at the gas station.

Patrick De Haan, head of petroleum analysis at GasBuddy, said: "It's a perfect storm of factors all aligning to create a rare environment of rapid price hikes. The situation could become even worse should there be any unexpected issues at the nation's refineries or a major hurricane that impacts oil production or refineries this summer."