US consumer prices accelerated by the most in nearly 13 years in May as pent-up demand combined with higher prices for goods to stoke concerns about inflationary pressures.
Consumer prices rose 5 per cent last month compared with a year ago, the Bureau of Labor Statistics said on Thursday. That represents the steepest increase since a 5.4 per cent acceleration in August 2008, and compares with a 4.2 per cent increase in April.
Stripping out volatile items like food and energy, so-called core CPI rose 3.8 per cent in May on an annual basis, after a 3 per cent rise in April.
While the recent surge in prices can partly be attributed to the low levels of inflation at the start of the coronavirus pandemic, it has also been driven by the increasing price of goods and demand for rental cars, hotels and flights as the US economy has reopened.
The index for used cars and trucks increased 7.3 per cent in May, accounting for about one-third of the increase in inflation. Used car prices have jumped amid a semiconductor shortage that hit car production.
Federal Reserve policymakers have been more tolerant of inflation partly because consumer prices were subdued for so long despite loose monetary policy.
The Fed has repeatedly said the recent inflation rise was likely to be transitory, not sustained. Minutes of the central bank’s April monetary policy meeting showed officials maintained a relatively sanguine approach to inflation.
But Gregory Daco, chief US economist at Oxford Economics, said that while some factors driving up inflation — like base effects and higher energy prices — would dissipate, some increases would be “sticky”.
Some, including 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.
He said there were signs that demand was responding to higher prices in a normal way, pointing to the decline in mortgage applications as one example. “That’s evidence that we are not in a serious expectations-driven inflation increase,” he said.
Source: Economy - ft.com
