US consumer prices climb at the fastest pace since 2008

US consumer prices increased by the most in nearly 13 years in May compared to a year ago, as inflationary pressures continued to flare up in the world’s largest economy.

The jump in the Bureau of Labor Statistics’ consumer price index (CPI) exceeded economists’ forecasts, fuelling an intense debate over the extent to which the American economy is in danger of overheating due to a mix of supply constraints and surging demand.

The CPI was 5 per cent higher last month compared with May 2020 — an acceleration compared to the 4.2 per cent annual rate of increase in April, and its fastest pace since hitting 5.4 per cent in August 2008.

Core CPI — the underlying measure of inflation that strips out volatile items like food and energy — rose 3.8 per cent in May on an annual basis, the most since 1992, after a 3 per cent rise in April.

The data was released as the Federal Reserve prepares to open a debate on slowing asset purchases put in place to support the economic recovery, though the judgment of most central bank officials is that the inflation surge will be transitory.

Top officials in the Biden administration, which is trying to convince Congress to pass more than $4tn in additional spending over the next decade, believe higher inflation is to be expected through next year as the economy recovers, but will not spiral out of control.

The surge in prices is partly due to the statistical impact of comparing this year’s increases to the low levels of inflation at the start of the coronavirus pandemic. Beyond that, Thursday’s report showed broad price increases- driven by the increasing cost of flights, household furnishings and operations, new cars, rental cars and apparel.

The index for used cars and trucks increased 7.3 per cent in May, accounting for about one-third of the increase in the CPI. Used car prices have jumped amid a semiconductor shortage that hit car production.

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

However, she cautioned that price increases tied to the reopening and supply chain bottlenecks would keep inflation “elevated and sticky as supply/demand imbalances are only gradually resolved”.

On a monthly basis, consumer prices rose 0.6 per cent, following a 0.8 per cent increase in April. Core CPI increased 0.7 per cent month-on-month.

Federal Reserve policymakers have been more tolerant of inflation partly because consumer prices were subdued for so long despite loose monetary policy.

Minutes of the central bank’s April monetary policy meeting showed officials maintained a relatively sanguine approach to inflation, but are prepared to discuss the first steps towards reducing the massive amount of monetary support for the economy introduced during the pandemic. In particular, they are expected to address how and when they might start shrinking the $120bn in monthly debt purchases that began last year.

“We think policymakers view starting tapering discussions sooner rather than later as a way of safeguarding inflation expectations against a possible accumulation of upside surprises in the months ahead,” Krishna Guha and Peter Williams of Evercore ISI wrote in a note on Thursday.

Some economists as well as many Republican lawmakers argue that the Fed has underestimated the risk of higher inflation.

“Inflation fears are a little bit like phantom limb pain in that they actually cut off the problem but it still hurts, and it hurts because the fear is remembered even if the limb is gone,” said James Sweeney, chief economist at Credit Suisse.

Larry Summers, the former US Treasury secretary who has emerged as a vocal critic of US fiscal and monetary policies, raised alarm bells after the data was released on Thursday.

“If overheating takes place in the US and there is an eventual spike in interest rates driven either by the Fed or the markets, there will be enormous risks to an already fragile and over leveraged global economy,” Summers said.

Market reaction to the data was subdued. The yield on the US 10-year Treasury initially climbed after the data but by midday was down 0.018 percentage points to 1.470 per cent. US stocks were positive, with the S&P 500 and Nasdaq up 0.5 and 0.67 per cent respectively.

The 10-year yield has returned to levels seen in early March, “signalling that the bond market is falling in line with the Fed’s thinking that inflation is transitory and does not warrant tapering of monetary stimulus any time soon,” said Anu Gaggar, senior global Investment analyst for Commonwealth Financial Network.

Additional reporting by Naomi Rovnick and Joe Rennison in London