US inflation soars, sparking sell-off on Wall Street | ABC NEWS

The US annual inflation rate has risen to 4 .2 % in May.That's the third consecutive monthly increase since the start of the war with Iran.The increase from 3 .8 % in April was largely driven by rising energy costs in the wake of the conflict.It's taken the inflation rate to a three -year high.When questioned about the increase, President Donald Trump said he loves the inflation and claimed the US has secretly been getting oil through the Strait of Hormuz.Hormuz blockade.

Well, stocks on Wall Street tumbled after the inflation data and how it's hurting the Middle East.Conflict is hurting the economy.Joining me to discuss is Carrington Clark, host of the ABC Business Daily.Very good morning to you, Carrington.Take me through those comments from the president.

Yeah, Donald Trump apparently loves inflation.Who doesn't love inflation are American consumers who are paying these inflated prices.Now, these inflation numbers were basically in line with what economists were forecasting.But the problem is this inflation rate of 4 .2 percent is well above the increase in wages at 3 .4 percent.What that means is that in real terms, Americans are going backwards.They're basically taking a pay cut and it's making life more unaffordable for them.

Now, Donald Trump likes to think of himself as kind of a master marketer, and I think he is attempting to change the perception of inflation, but it's pretty hard to convince people that paying more for essential items, things like petrol or gasoline as Americans call it, isa good thing.I don't think, no matter how many times he says this, Americans aren't going to buy it.We did see these shakes on Wall Street today.It did feel to me like a bit of a tone shift.Not only did we have these inflation figures, I think people were also worried about Donald Trump's response.

The markets have been betting that eventually Donald Trump will try to do a deal or will do a deal with Iran because he knows that this hurts him politically.And we are heading into these crucial midterm elections in November.Republicans are behind in the polls.Americans are hurting.Affordability is the big issue for them.But the fact that he shrugged off these numbers is concerning to his Republican colleagues, those people who are up for re -election or for election this year.

Donald Trump himself isn't.But the makeup of that, the House of Representatives and the Senate, will have a massive impact on the last two years of his second term and will determine how much of his agenda he can get through and whether or not he is facing impeachment once again.It also matters for us here in Australia.So the inflation numbers being so high.basically changes the calculation for the US Federal Reserve.That's their central bank.

They are meeting next week.This is the first meeting under Kevin Walsh, Donald Trump's hand -picked successor to lead the Federal Reserve.Now, the betting isn't that we're going to see the Federal Reserve hike or move actually on interest rates at the next meeting.But there is building momentum towards hiking interest rates further.And the reason that matters for Australia is we've seen our dollar pick up its value because we have had three interest rate hikes here.That has meant people wanted to invest in Australia, they want to buy Australian bonds, they want to take advantage of those higher interest rates.

But if American interest rates are going up, then we would, all other things being equal, see our currency fallthat actually makes the fight against inflation more difficult because the higher valued Australian currency means it's more inexpensive to buy things overseas, cheaper to buy imports, and that means inflationary pressures are slightly lower here.So we are going to have to watch that very carefully.It also potentially puts pressure on the Reserve Bank to also hike interest rates again.So we have a meeting next week from the Reserve Bank.They'll also be determining interest rates.

The betting at the moment is that we won't see a hike at this meeting.We've had three in a row.The Reserve Bank likely to keep things on hold, wait to see how that is impacting our economy.But there is a real possibility that we might see a hike in August, although...I should point out there is a real lack of consensus among Australia's leading economists at the moment about exactly what the next move should be for the Reserve Bank.On one hand, you're seeing growth slow.

On the other hand, we've still got very high inflationary pressures.What does the Reserve Bank do in order to have those kind of opposing forces?How do you weigh those two options, whether or not you're trying to slow the economy even further and risk potentially going into a recession versus trying to deal with these inflationary problems?It is a very difficult dance right now for the Reserve Bank.