In a blow for Biden — and most Americans — inflation accelerated again in May

A price spike in May dealt a blow to President Joe Biden and underscored the immense challenge facing the Federal Reserve as inflation, which many economists had expected to show signs of cooling, instead accelerated. to climb at its fastest pace since late 1981.

Consumer prices rose 8.6% from a year earlier and 1% from April – a faster monthly increase than economists had expected and about triple the previous pace. The rally partly reflects soaring gasoline prices, but even without the volatility in food and fuel prices, the rise was 0.6%, a strong monthly rate that matched April’s reading.

Friday’s consumer price index report offered more cause for concern than comfort for Fed officials, who are watching for signs of slowing inflation on a monthly basis as they attempt to bring price increases back to their target. A wide range of goods and services, including rent, gasoline, used cars and food, are becoming significantly more expensive, making this inflation spurt painful for consumers and suggesting it could last.

The rapid pace of inflation increases the odds that the Fed, which is already trying to cool the economy by raising borrowing costs, will need to act more aggressively and inflict hardship to temper consumer and business demand. The central bank is widely expected to hike rates by half a percentage point at its meeting next week and again in July. But Friday’s data prompted a number of economists to predict another big rate hike in September. A more active Fed would increase the chances of a sharp decline in growth, or even a recession.

“This suggests the Fed has more to do to bring inflation down,” Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, said of the inflation data. “It was strong across the board, not focused and above our expectations.”

Markets, worried about the Fed’s policy trajectory and the growing risk of a slowdown, fell after the release of the Labor Department report. The S&P 500 fell 2.9%. Yields on short-term government bonds, which serve as a benchmark for borrowing costs, rose sharply, with the two-year Treasury bill rate hitting 3.06%, its highest level since 2008.

Economists warn that tackling inflation could be a slow and painful process. Pandemic-related production and shipping snarls have shown early signs of easing but remain pronounced, keeping products like cars and trucks in short supply. The war in Ukraine is driving up food and fuel prices, and its trajectory is unpredictable. And consumer demand remains strong, driven by savings amassed during the pandemic and wages that are rising vigorously, but not enough to fully offset inflation.

“Inflation remains relentless – consumers continue to be hit from all sides,” said Sarah Watt House, senior economist at Wells Fargo. “There is very little relief from inflation in sight.”

In a statement after the release, Biden said the numbers underscored why inflation was his top priority, while also pointing out that prices were rising around the world.

But controlling inflation is primarily the Fed’s job, and Friday’s figures increased speculation that the Fed could raise rates by 0.75 percentage points in the coming months – even if significant Fed policymakers showed little appetite for such a drastic move.

“We believe the US central bank now has good reason to surprise markets by increasing more aggressively than expected in June,” Barclays economists wrote after the release.

The chorus of speculation illustrated just how gloomy consumer price news was, especially when accompanied by evidence that inflation expectations were rising. A measure of where households expect prices to be in five years hit its highest level since 2008 in preliminary data released on Friday.

Fed officials are likely to carefully analyze Friday’s report for clues as to what may come next. Used-vehicle costs, which economists had expected to moderate or even decline, rose rather sharply and were up 16.1% from a year earlier. New car prices rose 12.6%.

The jump was also driven by pandemic-hit industries like travel. People are taking vacations with a vengeance after years stuck at home, and airfares are up 37.8% from a year earlier. Hotel stays cost 22.2% more than last May.

Rents continue to rise sharply and a rent-related measure of housing costs for people who own their homes has accelerated. Housing indices account for about a third of headline inflation and generally move slowly, so they could put continued pressure on inflation in the months ahead.

In fact, a recent increase in rents on new leases tracked by private data providers means housing costs will likely continue to climb for some time as tenants renew or move out and face market costs. higher. There is also a risk that higher mortgage rates will prevent people from buying homes, compressing the supply of apartments.

“The rental market looks very tight: vacancies are very low, and because of this rents are rising at a brisk pace,” said Igor Popov, chief economist at Apartment List.

Overall, the report was disheartening for policymakers, and he pointed out that they have their work cut out for them as consumer and business demand remains strong. While the White House has put in place policies that could help families on the edge of inflation by improving supply or offsetting costs — like trying to clear port arrears or freeing up strategic oil reserves to ease increases in gas prices – the task of cooling consumption falls almost entirely to the central bank.

So far, spending shows few signs of cracking. Even as vacation costs skyrocket, for example, travelers continue to book trips.

“The resilience of travel is truly remarkable,” Marriott International CEO Anthony G. Capuano said at an event Tuesday with analysts, later adding that the hotel company was seeing “extraordinary pricing power.”

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Post expires at 2:37pm on Tuesday June 21st, 2022