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Soaring prices attract both shrugs and screams in Washington

“It’s probably time to be a little worried,” said Jack Ablin, chief investment officer at Cresset Capital. “Obviously the Fed wants to see some inflation. But one of the mistakes they can make is letting it heat up too much. And this economy is so used to very low interest rates that even a fairly small increase from the Fed could tip it over. “

Inflation concerns were rekindled on Thursday as the Labor Department announced that consumer prices rose 5% in May from a year ago, the fastest pace in nearly 13 years . The underlying inflation rate, which excludes food and energy price volatility, rose 3.8%, the largest increase since June 1992.

Democrats and many economists say that since the numbers are year-over-year comparisons, they look worse than they are, given severely depressed economic activity during nationwide Covid lockdowns around this time. Last year. And they note that much of the increase is due to higher prices for used cars and trucks, as well as air fares and clothing, which you would expect as the country emerges from lockdown. .

But the number of core month-to-month inflation has also increased more than expected. And some economists are now less convinced that the sharp price hikes will level off even if supply shortages from overseas ease, with U.S. consumer demand already rising to pre-Covid levels.

Republicans are increasingly seizing every bit of inflation data to criticize the Biden agenda and call on the Fed to stop pumping so much money into the system.

“We should all be very worried,” Sen. Pat Toomey of Pennsylvania, the highest-ranking Republican on the banking committee, tweeted. “The combination of the Fed’s average inflation targeting and its vision of transient inflation virtually guarantees the [central bank] will be late if inflation continues. Massive congressional spending is contributing to the problem. It is time to end it.

Some economists who cared little about recent price spikes are increasingly worried.

“The Fed has never said how much it expects a reopening spike, but we assume policymakers were surprised by the numbers from the past two months,” said Ian Shepherdson, chief US economist at Pantheon Macroeconomics, in a note to clients. “[T]They increase the risk that the easing of the labor supply that everyone expects in the fall will not be enough to ease wage pressures as much as is necessary, in order to avoid a sustained increase in the labor force. inflation next year.

Yet despite the higher-than-expected inflation numbers, bond investors shrugged off the news, with long-term interest rates on U.S. government debt falling that day.

“Financial markets appear to have bought into the Fed’s rhetoric that inflation is likely to be transient in the short term,” said Guy LeBas, chief fixed income strategist at financial firm Janney Montgomery Scott.

Fed policymakers will meet next week to provide more advice to investors on when the central bank plans to start withdrawing some of its economic support, although the pace of slower-than-expected employment growth probably means that a policy change is not imminent.

White House officials say they are also not very concerned about recent inflation figures, although they continue to monitor them closely. A senior administration official noted that much of the rise in inflation in May came from vehicles and “pandemic-affected services” like airline tickets and hotel prices. Without these, this person said, the inflation rate would be close to where it was in 2019.

And the expectation in the White House and within the Fed is that eliminating supply chain problems and bringing more workers back to the retail industry will ease much of the inflationary pressure.

The official also said the current labor shortage is also expected to ease once young workers who have only recently been vaccinated feel more comfortable returning to public jobs in hotels. , bars, restaurants and shops.

The Biden administration is seeking to push through both a major infrastructure spending bill and a family aid plan to address long-term economic inequality issues. These plans would add about $ 4 trillion more to federal spending over a decade.

And many economists stand by their belief that strong inflationary pressures will be short-lived, especially given the contribution of used car prices to the most recent report.

“Vehicle prices alone increased the core CPI by 0.38 percentage point last month and 0.32 percentage point this month,” said Eric Winograd, senior economist for investments at fixed income at AllianceBernstein, in a note to clients. “It seems very unlikely to be permanent – once the shortages ease and production resumes, used car prices in particular are expected to stabilize.”

One of the main concerns of economists is that inflation is beating almost all expectations and labor shortages may not abate as quickly as many are hoping. That’s because many Americans moved out during Covid, decided staying in the workforce wasn’t worth it, or felt persistent childcare issues would make it impossible to return to work.

“An increase in inflation was still likely to occur this year as economies reopened and energy prices recovered from the sharp drops last year,” said Vicky Redwood, senior economic advisor at Capital Economics, in a client note. “But in the United States in particular, the increase since the start of the year has exceeded even our relatively high expectations. While this may primarily reflect transient factors, we continue to believe that the risk of a sustained rise in inflation is greater in the United States than in other developed economies. “

The rise in rental housing prices has also alarmed some economists as it may turn out to be a persistent rather than a transitory rise.

“While the surprise upside CPI inflation in May was notable in itself, a key underlying detail was rising house prices,” Morgan Stanley analysts said Thursday. “[R]Rents rose 0.24% in May, the biggest increase since March 2020, and owner-equivalent rent rose 0.31% in May, the biggest increase since June 2019. ”

Meanwhile, the Fed continues to take a patient approach, showing little sense of urgency that much of the price hikes will persist.

Fed Chairman Jerome Powell stressed at the end of April that he wanted increased job and wage growth and did not expect inflation to persistently rise without a healthier labor market . “We are far from full employment,” he said at the time.

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