May 2021 Consumer Price Index Shows Fastest Inflation Since 2008

The Four Percent

Consumer prices rose in May at the fastest annual rate since 2008, a bigger jump than economists had expected and one that is sure to keep inflation at the center of political and economic debate in Washington.

The Consumer Price Index surged 5 percent in May from a year prior, the Labor Department said on Thursday. Economists had expected an increase of 4.7 percent. The price index rose 0.6 percent from April to May, compared with forecasts for a 0.5 percent gain.

Another measure that excludes volatile food and energy costs, rose 3.8 percent from a year earlier, the briskest pace since June 1992.

Prices are rising for everything from airfares to used cars, and the data released on Thursday offers policymakers and investors another chance to assess whether that pickup is likely to be short-lived — or is poised to be the kind of lasting inflation that officials would worry about.

As prices have climbed in recent months, government officials and many economists have said the jump is likely to fade with time. The annual number in particular is getting a boost from what’s called a base effect: The year-ago number was depressed by pandemic-driven shutdowns, so the current figures look large by comparison.

But the strong monthly figure for May, which came on the heels of a sharp rise in April, showed that prices have been moving up quickly for more than just technical reasons. The critical question is whether that is a transient trend tied to reopening or something more persistent.

“We are at peak heat, this is the moment,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives, who expects inflation to remain in line with the Federal Reserve’s 2 percent average goal over time. “We know we’ll get a fade — the question is, how big is the fade?”

Investors on Thursday were unmoved by the data. Yields on 10-year government bonds, which have been particularly sensitive to concerns about inflation were unchanged by midmorning, while stocks rose about half a percent — gains that put the S&P 500 on track to close at a record.

Still, the stakes are high on both Wall Street and Main Street. Inflation can erode purchasing power if wages do not keep up. A short-lived burst would be unlikely to cause lasting damage, but an entrenched one could force the Fed to cut its support for the economy, potentially tanking stocks and risking a fresh recession.

The Fed targets a different index as it aims for 2 percent average inflation, the Personal Consumption Expenditures measure. That gauge is closely linked to C.P.I., though it tends to run slightly below it.

Outside of the base effect, the recent pop in consumer prices has been driven by two trends. The economy is reopening from a global pandemic shutdown for the first time ever, and some materials are in short supply as manufacturers try to ramp up production. Also, some households are flush with cash to spend after multiple stimulus checks and months in lockdown, which has been goosing consumer demand.

Percent Change, May 2021 from May 2020

The 29.7 percent annual increase in used car prices reported for May is among the more striking examples of how bottlenecks are driving inflation. Demand for cars — used and new — is outpacing supply in part because of a global shortage of semiconductors that has hobbled vehicle production.

That chip shortage, which arose from factory shutdowns during the pandemic and one-off problems like a drought in Taiwan, could take time to resolve — but it should prove temporary. In a sign that companies are finding a way to adjust to the global shortage, General Motors said earlier in June that would start to increase shipments of pickup trucks and other vehicles to dealers.

But economists are parsing the data for signs that the price increases will prove longer lasting. For example, rent and owners’ equivalent rent, two measures of housing costs that make up a big share of the inflation reading, but which move slowly, are important to watch. Both moved higher in May.

“We are getting an earlier rebound than what we were envisioning — that’s significant,” said Laura Rosner-Warburton, also a founding partner at MacroPolicy Perspectives, speaking on the same call as Ms. Coronado. But Ms. Rosner also expects the pressures on other goods and services prices to fade, she said.

The fresh inflation figures are likely to spur continued debate in Washington, where the White House and Fed have been playing down the recent run-up as temporary as Republicans have used the price gains as ammunition in their critiques of Democrats’ spending.

Andrew Hunter, senior U.S. economist at Capital Economics, noted that the jump in the cost of food away from home — an index that tracks restaurant meals — suggested that higher labor costs were getting passed along to customers. The increase in housing prices suggested the acceleration in prices could prove longer lasting, he said.

“While inflation is likely fall back next year as base effects fade and some of the upward pressure on prices in the pandemic-hit sectors subsides, we expect core inflation to remain materially above the Fed’s target,” Mr. Hunter wrote in a note following the release.

The data was released less than a week before the central bank’s June meeting, which will give the Fed chair, Jerome H. Powell, another opportunity to address how he and his colleagues plan to achieve their two key goals — stable prices and full employment — in the tricky post-pandemic economic environment.

“The Fed has never said how big a reopening spike it expected, but we’re guessing that policymakers have been surprised by the past two months’ numbers,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note following the release, adding that they “do raise the risk that the loosening of labor supply everyone expects in the fall won’t be enough to dampen wage pressures as much as will be needed.”

The big policy question facing the Fed is when, and how quickly, it will begin to slow its $120 billion in monthly government-backed bond purchases. That policy is meant to keep borrowing of all kinds cheap and stoke demand, and because it bolsters stock prices, markets are very attuned to when central bankers will taper it.

Mr. Powell and his colleagues have repeatedly said that they need to see “substantial” further progress toward maximum employment and stable inflation that averages 2 percent over time before they pull back from that policy.

A “number” of officials said that it would soon be time to begin discussing a policy change at the Fed’s last meeting, and the inflation figures are another data point likely to ramp up pressure to get moving sooner rather than later.

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