Already there are inflation concerns over rising prices

Prices paid by American consumers rose last month are running ahead of forecast, extending a months-long buildup in inflation that risks becoming more established as the economy strengthens.

The Consumer Price Index (CPI) climbed 0.6 per cent in May, representing the second-largest advance in more than a decade. Though distorted by the pandemic, the CPI jumped five per cent from a year ago, the largest annual gain since August 2008.

Data coming out of the US Labor Department yesterday suggests that the gains were in large part driven by the pricing snapback in categories associated with a broader reopening of the economy. Price pressures continue to build across the economy as businesses scramble to balance a rush of demand against shortages of materials in some cases labour.

Aside from the volatile food and energy components, the so-called core CPI rose by a larger-than-forecast 0.7 per cent. The core measure rose 3.8 per cent from 12 months ago, the most since 1992. It’s also distorted by the comparison to the pandemic-depressed reading last year.

Growth in cost of used vehicles

The CPI report showed steady growth in the costs of used vehicles, household furnishings, airfares and apparel. According to the Labour Department, the increase in previously owned cars and trucks accounted for about one-third of the total monthly advance in the CPI.

While the large gains in these areas support the Federal Reserve’s view of temporary price pressures, Bloomberg quoted Wells Fargo economist, Sarah House as saying, “we see signs of inflationary pressures broadening out, which we believe will keep monthly price gains from merely falling back to their pre-pandemic trend”.

Underscoring the clear acceleration in inflation more recently, the core CPI over the past three months has increased at a 5.2 per cent annualized pace, the fastest since 1991. Strong consumer spending on merchandise in part driven by government stimulus has led to growing orders backlogs and lean inventories.

The lifting of pandemic restrictions, increases in vaccinations and a flurry of social activity are translating into more services demand, another propellant for inflation.

“The May CPI report shows reopening-sensitive categories dominating price pressures for a second straight month,” Bloomberg economists Andrew Husby and Yelena Shulyatyeva contended.

Questions about impact will be temporary

However, the question economists and investors are wrestling with is whether these factors will have a temporary impact on inflation as the Fed expects or whether they will become more ingrained against a backdrop of massive fiscal and monetary policy support.

After rising earlier, the yield on the 10-year Treasury slipped back below 1.5 per cent as investors digested the data. The dollar was little changed and the S&P 500 advanced to a fresh record. Separate figures showed applications for state jobless benefits declined for a sixth straight week.

Fed Chair Jerome Powell has said upward pressure on prices is likely to be temporary, noting in late April that “in an episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation into the future”.

Others according to Bloomberg disagree, citing trillions of dollars in fiscal support, the likely persistence of product shortages and rising labor costs. While wage growth has blown past economists’ estimates in the last two monthly jobs reports, the rise in consumer prices has taken a sizable toll.

Inflation-adjusted average hourly earnings declined 0.2 per cent in May after a 0.1 per cent drop, separate data showed yesterday. The retreat in real earnings, if it persists, could prompt workers to ask for a bump in pay.