The numbers: The cost of living rose again in May, propelling inflation to a 13-year high of 5%, reflecting a broad-based price hike facing Americans as the economy recovers.
The consumer price index rose 0.6% last month, marking the fourth major rise in a row, the government said on Thursday. Rising used car prices accounted for a third of the total increase in May.
Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% rise in CPI.
Inflation rose last year from 4.2% in the previous month to 5%. That brought it to its highest level since 2008, when the price of oil hit a record $150 a barrel.
Before that, the last time inflation was as high as it is now in 1991.
Another closely monitored inflation measure that excludes volatile food and energy also shot up 0.7% in May. The 12-month interest rate climbed from 3% to 3.8%, a 29-year high.
The core rate is closely followed by economists as a more accurate measure of underlying inflation.
Big picture: Rising inflation strikes much of the reopening of the economy, but if price pressures do not abate in the near future, this could put more pressure on the US recovery.
The Federal Reserve, the country’s inflation watchdog, insists that price pressures will soon ease once the US and world economies return to normalcy. The rise in inflation is usually linked to temporary deficits that will disappear as supply overtakes demand, senior Fed officials say.
The central bank predicts inflation will decline to 2% next year, using his favorite PCE price barometer. The PCE index rose to 3.6% in April from a year earlier, its strongest level since 2008.
The concern of some inflation watchers is that some of the increase will be embedded in wages and prices and become more difficult to eradicate. The Fed should raise interest rates sooner than it wants and, in the worst case scenario, could risk shorting the economy.
The debate will take place over the next year. For now, Wall Street isn’t too concerned.
Key details: Last month’s price hikes were widespread.
The cost of used vehicles, food, furniture, clothing, airline tickets, recreational goods, insurance and alcohol all rose.
Record used car and truck prices was the largest contributor to inflation last month. Prices rose by 7.3% after a 10% increase in April.
The cost of groceries rose by 0.4% in May. The bad news is that prices will likely continue to rise for a while. Packaging and crop costs have risen and producers and retailers are likely to try to pass those increases on to customers.
Americans got a little relief from energy prices, but that probably won’t last long. Energy prices were flat, largely due to a small decline in gasoline prices.
Energy has been a major driver of the recent rise in inflation. They are up 29% in the past year.
For example, a gallon of regular gas costs about $3.10 nationwide. The price had fallen to less than $2 a gallon shortly after the pandemic hit.
Rents rose 0.2% in May – the largest increase in more than a year – to push up last year’s increase to 1.8%.
Rents have risen slowly, partly as a result of government restrictions on evictions. What is less clear is what will happen when the restrictions expire. Shelter is the biggest expense for most consumers.
Some prices fell in May, especially medical care. The cost of medical care has risen by less than 1% in the past 12 months, the smallest annual increase since 1941.
What do they say? “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 the peak for annual inflation readings, which should slowly fade to the pre-Covid trend over the next year,” said Nationwide Economics senior economist Ben Ayers.
Market reaction: The Dow Jones Industrial Average
and S&P 500
rose in Thursday’s trading.
In general, investors have accepted the Fed’s argument that inflation will ease next year. Others may worry about the problem later.