The average American is shelling out an extra $311 a month because of the hottest in a generation, according to a new Moody's Analytics analysis.
Ryan Sweet, a senior economist at Moody's Analytics, said this is a little less than last month but still a noticeable burden on households.
The financial squeeze is due to the rising cost of a number of everyday goods, including cars, rent, food, gasoline and health care.
The Labor Department reported on Wednesday that inflation accelerated in April, with the consumer price index rising by 8.3%. While it's down a bit from the 41 year high notched in March, it was much higher than economists expected and underscores that inflationary pressures in the economy remain strong.
Sweet came up with that figure by comparing prices for goods and services in April versus how much households would have paid for the same items when inflation was 2.1%, the average in 2018 and 2019.
Inflation is eating away at the strong wage gains American workers have seen in recent months: Real average hourly earnings decreased by 0.1% in April from the previous month, as the inflation increase eroded the 0.3% total wage gain, according to the Labor Department. Real earnings dropped by 2.6% in April.
President Biden has had a political headache because of the inflation spike, which has led to his approval rating falling as consumer prices go up. It has forced the Federal ReserveFederal Reserve to embark on the most ambitious policy tightening mission in decades: Policymakers raised the benchmark interest rate by 50 basis points in May for the first time since 2000, and signaled that similarly sized hikes are on the table at coming meetings as they try to tame inflation.
Fed Chairman Jerome Powell told reporters last week that inflation is too high, and we are moving quickly to bring it back down, because we understand the hardship it is causing. There is a broad sense on the committee that additional 50 basis point increases should be put on the table at the next couple of meetings, given that economic and financial conditions evolve in line with expectations. The Fed is concerned that it may drag the economy into a recession with its aggressive rate hike course. Bank of America, Fannie Mae and Deutsche Bank are among the Wall Street firms that predict a downturn within the next two years, which has rattled investors and markets.
Powell conceded on Thursday that achieving the soft landing the sweet spot between cooling consumer demand without crushing economic growth could be tricky.
Sweet, the Moody's economist, said he agreed that the possibility of a soft landing is becoming increasingly smaller.
He wrote that the Fed could be faced with a Hobson's choice: push the economy into a mild recession similar to our scenario, tame inflation or wait and possibly cause a more significant recession because a stagflation scenario is possible next year if the Fed isn't aggressive enough.