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U.S. consumer prices have been rising at the fastest pace since 2008

U.S. consumer prices rose the most in nearly 13 years in May from a year ago as inflationary pressures continued to rise in the world’s largest economy.

The jump in the Consumer Price Index (CPI) of the Bureau of Labor Statistics has exceeded economists ’expectations, sparking a heated debate over the mix of supply constraints and high demand that is threatening to warm the U.S. economy.

The CPI was 5 per cent higher last month compared to May 2020 – an acceleration compared to the 4.2% year-on-year growth rate in April, and the fastest pace since reaching 5.4 per cent in August 2008.

The core CPI – an underlying measure of inflation that removes volatile items like food and energy – rose 3.8 percent in May each year, the most since 1992, after rising 3 percent in April.

The data came as the Federal Reserve was preparing to open a debate on slowing down the purchase of assets to boost economic recovery, although most central bank officials believe the rise in inflation will be temporary.

Top officials in the Biden administration, who are trying to persuade Congress to overcome the $ 4 billion in additional spending over the next decade, believe higher inflation is expected as the economy recovers next year, but will not get out of control.

The rise in prices is partly due to the statistical impact of this year’s growth compared to low inflation levels at the beginning of the coronavirus pandemic. Beyond that, Thursday’s report showed large price increases, driven by rising costs of flights, home furniture and operations, new cars, rental cars and clothing.

The used car and truck index rose 7.3% in May, to about a third of the increase in the CPI. Used car prices they have jumped into the shortage of semiconductors that has confronted car production.

“We believe this will be the culmination of the annual inflation rate as strong fundamental effects subside in the coming months,” said Kathy Bostjancic, chief financial economist at Oxford Economics in the US.

However, he warned that rising bottleneck prices in the reopening and supply chain would keep inflation “high and sticky as supply / demand imbalances are gradually resolved”.

Monthly, consumer prices rose by 0.6%, after rising by 0.8% in April. The base CPI rose 0.7 percent month-on-month.

Federal Reserve officials have been more tolerant of inflation, partly because consumer prices have been lower despite free monetary policy.

Minutes the central bank’s monetary policy meeting in April showed that officials maintained a relatively bloody outlook on inflation, but are ready to discuss the first steps in reducing the massive subsidy to the economy introduced during the pandemic. In particular, they will address how and when to start the $ 120 billion debt purchases that began last year.

“We believe that politicians are deciding to reduce the debate as a way to protect inflation expectations sooner rather than later, in the face of potentially upheaval in the coming months,” Krishna Guha and Peter Williams of Evercore ISI wrote Thursday.

Some economists and many Republican lawmakers say the Fed has underestimated the risk of higher inflation.

“Fears of inflation are similar to the ghost of bodily pain, in that they cut the problem but it still hurts, and it hurts because you remember the fear even if the limb is gone,” said James Sweeney, chief economist at Credit Suisse.

Former U.S. Treasury Secretary Larry Summers, who appeared as a voice in criticism of U.S. tax and monetary policy, raised alarms after the data was released Thursday.

“If the U.S. heats up too much and there is a rise in interest rates driven by the Fed or the markets, there will be tremendous risks for a global economy that is already fragile and growing,” Summers said.

The market reaction to the data slowed. The U.S. 10-year Treasury yield rose after the data but by 0.018 percentage points fell by 1,470 percent at noon. US stocks were positive, with the S&P 500 and Nasdaq rising 0.5 and 0.67 percent, respectively.

The 10-year performance has returned to levels seen in early March, with “the Fed’s bond market is transient in inflation and will soon have no reduction in monetary stimulus,” said Anu Gaggar, a senior global investment analyst at the Commonwealth Financial Network.

Additional report by Naomi Rovnick and Joe Rennison in London

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