Inflation sped up again in may dashing hopes for relief

Last updated Jun 10, 2022

A price hike in May dealt a blow to President Biden, underscoring the huge challenge facing the Federal Reserve as inflation, which many economists had expected to show signs of cooling, instead accelerated again to reach its fastest pace. increasing since the end of 1981.

Consumer prices rose 8.6 percent from a year ago and 1 percent from April — a monthly increase faster than economists had predicted and about three times the previous rate. The pick-up partly reflected rising gas costs, but after removing volatile food and fuel prices, they still rose 0.6 percent, a solid monthly rate that matched April’s reading.

Friday’s Consumer Price Index report provided more cause for concern than comfort for Fed officials, who watch for signs of inflation cooling on a monthly basis as they try to steer price increases back toward target. A wide range of products and services, including rent, gas, used cars and food, are becoming increasingly expensive, making this inflationary wave painful for consumers and suggesting it may be holding out. Policymakers aim for 2 percent inflation over time using a different but related indexwhich is also increased.

The rapid pace of inflation increases the likelihood that the Fed, which is already trying to cool the economy by raising borrowing costs, will have to act more aggressively and hurt to dampen consumer and business demand. The central bank is widely expected to raise interest rates by half a percentage point at its meeting next week and again in July. But Friday’s data prompted some economists to note another major rate hike in September. A more active Fed would increase the likelihood of a marked slowdown in growth or even a recession.

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

The markets, nervous about the Fed’s policy path and the increasing risk of a downturn, collapsed after the Labor Department released the report. The S&P 500 fell 2.9 percent. Short-term government bond yields, which serve as a benchmark for borrowing costs, rose sharply, with two-year government bond yields reaching 3.06 percent, the highest level since 2008.

High inflation and the Fed’s efforts to contain it are contributing to a gloomy economic mood. Consumer confidencesinking since last year as households take the brunt of higher prices collapsed to a new low in a report to be released Friday. President Biden’s approval ratings have suffered too, and Wall Street economists and small business owners are increasingly concerned that a recession is possible in the coming year.

That gloomy stance — and the fact that inflation shows little clear sign of abating — is creating problems for Mr Biden and Democrats as the November midterm elections approach. As rising prices weigh on voters’ wallets and minds, it has been clear to policymakers across the administration that helping bring inflation back to a more sustainable pace is their top priority, but that it is primarily the job of the Fed. .

Economists warn that struggling with lower inflation could be a slow and painful process. The pandemic-related manufacturing and shipping disruptions have shown early signs of easing, but stay outspoken, which means that products such as cars and trucks remain scarce. The war in Ukraine is raising food and fuel prices and its course is unpredictable. And consumer demand remains strong, supported by savings built up during the pandemic and wages rising briskly, though not enough to fully offset inflation.

“Inflation remains inexorable — consumers are still being hit from all sides,” said Sarah Watt House, senior economist at Wells Fargo. “Very little inflation relief is in sight.”

In a statement after publication, Mr Biden said the numbers underlined why inflation is a top priority of his, while highlighting that prices are rising around the world.

“My administration will continue to do everything it can to lower prices for the American people,” he said in the statement. “We all have work to do to reduce inflation.”

But controlling inflation is primarily the job of the Fed, and Friday’s figures fueled speculation that the Fed could raise interest rates by 0.75 percentage points in the coming months – although key Fed policymakers have little to say. have expressed interest in such a drastic step.

“We think the Federal Reserve now has good reason to surprise markets by walking more aggressively than expected in June,” economists at Barclays wrote after the release.

The chorus of speculation illustrated how gloomy the consumer price news was, especially when coupled with indications that inflation expectations are rising. A value from where households expect prices to be five years from now hit their highest value since 2008 in preliminary data released Friday.

Fed officials are likely to carefully analyze Friday’s report for hints about what might come next. Part of the price acceleration in May was due to a continued rise in the prices of key commodities. Used vehicle costs, which economists had expected to moderate or even fall, instead rose sharply, rising 16.1 percent from a year ago. The prices of new cars rose by 12.6 percent.

The jump was also driven by pandemic-affected industries such as travel. People take revenge on vacation after years of sitting at home, and the plane tickets were up 37.8 percent from a year ago. Hotel stays cost 22.2 percent more than last May.

And the war in Ukraine clearly affected inflation rates. Food costs have risen rapidly amid supply chains and fertilizer shortages, and Russia’s invasion has exacerbated that situation by disrupting Ukraine’s grain shipments in ways that have bounced off the global market. Gas prices are also rising sharply, something that started before the invasion, but has increased as a result.

While those trends in goods, pandemic-affected categories and war-induced prices may eventually reverse on their own, Friday’s report also showed signs of a stickier kind of inflation — one that could be harder to eradicate.

Rents are still rising sharply and a rent-related measure of housing costs for people who own their own home has accelerated. Housing indices represent about a third of headline inflation and generally move slowly, so they could put pressure on inflation in the coming months.

A recent rise in rents for new leases tracked by private data providers means that housing costs are likely to continue rising for some time to come as tenants renew or relocate and face higher market costs. There is also a risk that higher mortgage rates will discourage people from buying houses, putting pressure on the supply of apartments.

“The rental market feels very tight: vacancy rates are very low and rents are therefore rising at a strong clip,” said Igor Popov, chief economist at Apartment List.

A few details in the new data could offer a glimmer of hope for the Fed and the White House. Some commodity prices that had risen last year amid shortages are now falling: Audio and visual products such as televisionsbecome cheaper again, for example. And core inflation, the measure without food and energy costs, moderated to 6 percent year on year, from 6.2 percent the previous month.

But that slowdown was partly because the numbers are now measured against last year’s highs: inflation had risen by May 2021. This so-called “base effect” makes annual profits seem lower, even if prices steadily climbing on a monthly basis.

Overall, the report was a discouraging report to policymakers, highlighting that they still have a lot of work ahead of them as consumer and business demand remains strong. While the White House has enacted policies that could help families with inflation on the fringes by improving supply or offsetting costs — such as trying to clean up port backlogs or freeing up strategic petroleum reserves to dampen gas price hikes — the task of cooling consumption is almost entirely left to the central bank.

So far, spending shows little sign of cracking. Even when vacation costs skyrocket, for example, travelers continue to book trips.

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

That may be because households have amassed huge savings in recent years, first because they stayed at home during the pandemic and later because the government sent checks and other aid money until 2021. While poorer families are debit their checking accountsbalances remain remarkably high for wealthier households.

Households still have about $2.3 trillion in excess savings, based on estimates by Matthew Luzzetti, chief US economist at Deutsche Bank. Wages don’t keep up with inflation – average hourly wage climbed 5.2 percent in the year through May, well behind price increases – but those cash buffers could help families spend through higher prices and interest rates.

The result? When it comes to headline inflation, “the peak is still ahead of us,” said Wells Fargo’s Ms. House.

Lydia DePillis and Ana Swanson reporting contributed.

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