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Economic Report: U.S. consumer prices soar again and push CPI inflation rate to 13-year high

The numbers: The cost of living surged again in May and drove the pace of inflation to a 13-year high of 5%, reflecting a broad increase in prices confronting Americans as the economy recovers.

The consumer price index jumped 0.6% last month to mark the fourth large gain in a row, the government said Thursday. Soaring used-car prices accounted for one-third of the overall increase in May.

Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% increase in the CPI.

Read: Consumers are feeling the pinch from higher inflation and they don’t like it

Also: Why aren’t Americans happier about the economy? They are paying higher prices for almost everything

The rate of inflation over the past year escalated to 5% from 4.2% in the prior month. That put it at the highest level since 2008, when the cost of oil hit a record $150 a barrel.

Before that the last time inflation was as high as it is now was in 1991.

Another closely watched measure of inflation that omits volatile food and energy also shot up 0.7% in May. The 12-month rate climbed to 3.8% from 3%, a 29-year high.

The core rate is closely followed by economists as a more accurate measure of underlying inflation.

Big picture: Soaring inflation stems in large part from the reopening of the economy, but if prices pressure don’t ease in the near future it could put more stress on the U.S. recovery.

The Federal Reserve, the nation’s inflation watchdog, insists price pressures will wane soon once the U.S. and global economies regain a more normal footing. The upsurge in inflation is mostly tied to temporary shortages that will fade away as supply catches up to demand, senior Fed officials say.

The central bank predicts inflation will taper off toward 2% by next year, using its preferred PCE price barometer. The PCE index climbed to 3.6% in April from a year earlier, marking the strongest reading since 2008.

Read: U.S. job openings soar to a record 9.3 million, but many are going unfilled

Also: Record job openings and higher pay not enough to get Americans back to work

The worry among some inflation watchers is that part of the increase will get embedded in wages and prices and become harder to eradicate. The Fed would have to raise interest rates sooner than it wants and risk short-circuiting the economy in a worst-case scenario.

Read: Inflation is still climbing and higher labor costs are adding to the pressure

The debate will play out over the next year. For now, Wall Street isn’t worrying all that much.

Key details: The increase in prices last month was widespread.

The cost of used vehicles, food, furniture, clothes, plane tickets, recreational goods, insurance and alcohol all rose.

Record prices for used cars and trucks was the biggest contributor to inflation last month. Prices climbed 7.3% after a 10% gain in April.

The cost of groceries rose 0.4% in May. The bad news is prices are likely to keep going up for a while. The cost of packaging and farm crops have surged and producers and retailers are likely to try to pass those increases along to customers.

Americans got a bit of relief from energy prices, but it probably won’t last long. Energy prices were flat largely because of a small decline in gasoline prices.

Energy has been a big driver of the recent increase in inflation. They’ve climbed 29% in the past year.

A gallon of regular gas, for example, costs about $3.10 nationwide. The price had fallen to under $2 a gallon shortly after pandemic struck.

Rents rose 0.2% in May — the largest increase in more than a year — to nudge the increase over the past year up to 1.8%.

Rents have risen slowly partly because of government restrictions on evictions. What’s less clear is what will happen once the restrictions expire. Shelter is the single biggest cost for most consumers.

A few prices fell in May, most notably medical care. The cost of medical care has risen less than 1% in the past 12 months, the smallest yearly increase since 1941.

What they are saying? “Consumer spending is recovering faster than the economy’s productive capacity in some sectors, temporarily pushing inflation higher,” said senior economist Bill Adams of PNC Financial Services. 

“This is likely to be the peak for annual inflation readings, which should fade slowly over the next year back towards the pre-Covid trend,” said senior economist Ben Ayers of Nationwide Economics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.52%

and S&P 500
SPX,
+0.57%

rose in Thursday trades.

By and large, investors have bought into the Fed’s argument that inflation will subside by next year. Other figure they can worry about the problem later.

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