US consumer prices climb at the fastest pace since 2008

Consumer prices in the United States rose the most in nearly 13 years in May compared to a year ago, as inflationary pressures continued to intensify in the world’s largest economy.

The surge in the Bureau of Labor Statistics Consumer Price Index (CPI) has beaten economists’ forecasts, fueling an intense debate about the extent to which the U.S. economy is likely to overheat due to a mix of stresses of supply and high demand.

The CPI was 5% higher last month compared to May 2020 – an acceleration from the 4.2% annual rate of increase in April, and its fastest pace since reaching 5, 4% in August 2008.

Core CPI – the underlying measure of inflation that excludes volatile items like food and energy – rose 3.8% in May on an annual basis, the highest since 1992, after an increase of 3% in April.

The data came out as the Federal Reserve prepares to open a debate on the slowdown in asset purchases put in place to support the economic recovery, although the judgment of most central bank officials is that the push inflation will be transient.

Senior officials in the Biden administration, which is trying to convince Congress to spend more than $ 4 billion in additional spending over the next decade, believe higher inflation is to be expected until next year as the economy recovers, but will not get out of hand.

The price spike is in part due to the statistical impact of comparing this year’s increases with the low levels of inflation at the start of the coronavirus pandemic. Beyond that, Thursday’s report showed large price increases – driven by the rising cost of thefts, furniture and household operations, new cars, rental cars and clothing.

The used cars and trucks index rose 7.3 percent in May, accounting for about a third of the rise in the CPI. Used car prices surged amid a semiconductor shortage that hit auto production.

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

However, she warned that price increases linked to reopening and supply chain bottlenecks would keep inflation “high and persistent, as imbalances between supply and demand are only gradually resolved. “.

On a monthly basis, consumer prices rose 0.6%, after increasing 0.8% in April. Core CPI rose 0.7% month-on-month.

Federal Reserve policymakers have been more tolerant of inflation, in part because consumer prices have been subdued for so long despite lax monetary policy.

Minutes of the central bank’s monetary policy meeting in April showed that officials maintain a relatively optimistic approach to inflation, but are ready to discuss the first steps towards reducing the massive amount of monetary support to the economy introduced during the pandemic. In particular, they should consider how and when they could begin to cut the $ 120 billion in monthly debt purchases that began last year.

“We believe policymakers view the start of reduction talks sooner rather than later as a way to shield inflation expectations from a possible build-up of upside surprises in the months to come,” wrote Krishna Guha and Peter. Williams of Evercore ISI in a note Thursday.

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

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

Larry Summers, the former US Treasury Secretary who has become a vocal critic of US fiscal and monetary policies, sounded the alarm after the data was released Thursday.

“If overheating occurs in the United States and there is a possible spike in interest rates induced either by the Fed or by the markets, there will be enormous risks to an already fragile and over-leveraged global economy. “said Summers.

The market response to the data has been moderate. The 10-year US Treasury yield initially climbed after the data, but as of noon it was down 0.018 percentage point to 1.470 percent. US stocks were positive, with the S&P 500 and Nasdaq up 0.5 and 0.67% respectively.

The 10-year yield returned to levels seen in early March, “meaning the bond market is falling in line with the Fed’s thinking that inflation is transient and does not justify a gradual reduction in monetary stimulus by so soon, ”said Anu Gaggar, senior global investment analyst for Commonwealth Financial Network.

Additional reporting by Naomi Rovnick and Joe Rennison in London

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