As Inflation Sets Another Record in June, the Impact on CUs Is Obscured

NAFCU Chief Economist Curt Long said Wednesday’s report that inflation rose a record 9.1% in June could lead the Fed to consider raising rates by a full percentage point when it meets July 26-27.

The U.S. Bureau of Labor Statistics (BLS) reported that inflation rose a seasonally adjusted 1.3% from May to June, and rose 9.1% from June 2021 to June 2022 — the largest 12-month gain since November 1981. In May, the 12-month gain was 8.6%, the largest since December 1981.

Putting aside energy and food, inflation rose 5.9% from a year earlier and a seasonally adjusted 0.7% from May.

“Inflation was hotter than expected in June and accelerated even after stripping out food and energy prices,” Long said.

BLS reported that rent rose 0.8% from May to June, the largest monthly increase since April 1986, while the owners’ equivalent of rent index rose 0.7%.

Other components of inflation included:

• Gasoline, which rose 59.9% from a year earlier, and a seasonally adjusted 11.2% from May.
• Food, which rose 12.2% from a year earlier and a seasonally adjusted 1% from May.
• New cars, which rose 11.4% from a year earlier, and a seasonally adjusted 0.7% from May.
• Used cars, which rose 7.1% from a year earlier, and a seasonally adjusted 1.6% from May.

CUNA Senior Economist Dawit Kebede said the 9.1% gain was higher than the consensus expectation. While a broad category of items contributed to the spike, he said energy prices were behind half of the increase since May.

“There are signs that some of the main drivers of inflation are easing, such as lower oil and other commodity prices in July, slower wage growth and declining supply chain pressures,” Kebede said. “However, service price increases led by housing and pent-up demand for vehicles will keep inflation elevated in the coming months.”

“There is a higher chance that the Federal Reserve will raise interest rates by 75 basis points if not more by the end of the month given a strong jobs report, broad-based price increases and elevated inflation expectation,” Kebede said.

Long agreed that price growth may be slowing in July given the recent drop in gasoline prices and slowing wage growth, “but the Fed is focused on actual inflation data, not conjecture.”

“The June data leaves no doubt that the FOMC (Federal Open Market Committee) will raise the target federal funds rate by 75 basis points later this month and even puts a 100 basis point hike on the table,” Long said.

Long said the impact of inflation on credit union earnings is still ambiguous.

“Higher inflation has already led to higher interest rates, which support credit union earnings since they earn yield on their investments and loans,” Long said. “But inflation is also prompting the Federal Reserve to tighten policy, which slows the economy and hurts loan demand overall.”

“It’s still important to note that credit unions have always had a track record of providing loans, specifically mortgage loans, where other lenders won’t,” he said. “Mortgage origination activity has, however, dropped sharply in recent months.”