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May 2021 consumer price index shows fastest inflation since 2008

Consumer prices rose in May at the fastest annual rate since 2008, a bigger jump than economists had expected and which is sure to keep inflation at the center of the political and economic debate in Washington.

The consumer price index jumped 5% in May from a year earlier, the Labor Department said Thursday. Economists expected a 4.7% increase. The price index rose 0.6% from April to May, compared to expectations of a 0.5% gain.

Another measure that excludes volatile food and energy costs, rose 3.8% from the previous year, the fastest pace since June 1992.

Prices are rising for everything from plane tickets to used cars, and data released Thursday gives policymakers and investors another chance to assess whether this pickup is likely to be short-lived – or not. it’s poised to be the kind of lasting inflation policymakers would worry about. about.

As prices have climbed in recent months, government officials and many economists have said the jump is expected to fade over time. The annual number in particular is boosted by what’s called a base effect: The number from a year ago was depressed by closures due to a pandemic, so the current numbers look high in comparison.

But the good monthly figure for May, which follows a sharp increase in April, showed that prices have risen rapidly for reasons other than technical ones. The critical question is whether this is a transient reopening trend or something more persistent.

“We are at the height of the heat, now is the time,” said Julia Coronado, founder of research firm MacroPolicy Perspectives, who expects inflation to stay in line with the average target of 2%. the Federal Reserve over time. “We know we’ll have a fade – the question is, how big is the fade?” “

Investors on Thursday were not affected by the data. Yields on 10-year government bonds, which were particularly sensitive to inflation concerns, were unchanged mid-morning, while stocks rose about half a percent – gains that put the S&P 500 on track to close at an all time high.

Yet the stakes are high on Wall Street and Main Street. Inflation can erode purchasing power if wages don’t keep up. A short-lived burst would likely not cause lasting damage, but a entrenched burst could force the Fed to reduce its support for the economy, which could cause stocks to plummet and risk another recession.

The Fed targets a different index because it targets an average inflation of 2%, the measure of personal consumption expenditure. This indicator is closely related to the CPI, although it tends to be slightly lower.

Apart from the base effect, the recent rise in consumer prices has been driven by two trends. The economy is reopening for the very first time after a global pandemic shutdown, and some materials are scarce as manufacturers try to ramp up production. In addition, some households are bursting with cash to spend after multiple stimulus checks and months of foreclosures, which has inflated consumer demand.

Percent change, May 2021 compared to May 2020

The 29.7% annual increase in used car prices reported for May is one of the most striking examples of how bottlenecks drive inflation. Demand for cars – used and new – exceeds supply in part because of a global semiconductor shortage that has hampered vehicle production.

This chip shortage, which is due to plant closures during the pandemic and one-off issues like a drought in Taiwan, could take time to resolve – but it is expected to prove temporary. As a sign that companies are finding a way to adjust to the global shortage, General Motors said earlier in June that it would start increasing shipments of pickup trucks and other vehicles to dealerships.

But economists are analyzing the data for signs that the price increases will prove to be more lasting. For example, rent and owner’s rent equivalent, two measures of housing costs that make up a large part of the inflation reading, but move slowly, are important to watch. Both increased in May.

“We’re getting a rebound sooner than we imagined – it’s important,” said Laura Rosner-Warburton, also founding partner of MacroPolicy Perspectives, speaking on the same call as Ms. Coronado. But Rosner also expects price pressures for other goods and services to ease, she said.

The new inflation figures are likely to stimulate further debate in Washington, where the White House and the Fed have downplayed the recent surge as temporary, as Republicans have used the price gains as ammunition in their criticism of spending by Democrats.

Andrew Hunter, senior US economist at Capital Economics, noted that the rising cost of food outside the home – an index that tracks dining out – suggested that higher labor costs were being passed on on customers. The rise in house prices suggests that the acceleration in prices may prove to be more sustainable, he said.

“While inflation is likely to fall again next year as the base effects fade and some of the upward pressure on prices in sectors affected by the pandemic eases, we expect to keep core inflation significantly above the Fed’s target, “Hunter wrote in a note following The Release.

The data was released less than a week before the central bank’s June meeting, which will give Fed Chairman Jerome H. Powell another opportunity to explain how he and his colleagues plan to achieve their goals. two key objectives – stable prices and full employment – in the delicate post-pandemic economic environment.

“The Fed never said how much it expected a reopening spike, but we assume policymakers were surprised by the numbers for the past two months,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics , in a note after the publication, adding that they “increase the risk that the loosening of the labor supply that everyone expects in the fall will not be enough to ease wage pressures as much as needed.” .

The big political question the Fed faces is when and how quickly it will start slowing down its $ 120 billion monthly government guaranteed bond purchases. This policy aims to keep borrowing of all kinds low and to fuel demand, and because it supports stock prices, markets are very careful when central bankers cut it.

Mr Powell and his colleagues have said on several occasions that they must see further “substantial” progress towards maximum employment and stable inflation that hovers around 2% over time before opting out of this policy.

A “number” of officials have said it will soon be time to start discussing a policy change at the latest Fed meeting, and inflation numbers are another data point that is likely to hit. step up the pressure to act as soon as possible.

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