Inflation accelerated further in May, with prices up 8.6% from a year ago, the fastest rise since December 1981, the Bureau of Labor Statistics reported on Friday.
The consumer price index, a broad measure of the prices of goods and services, rose even more than the 8.3% estimate for the Dow Jones. Excluding volatile food and energy prices, the so-called underlying CPI rose 6%, slightly above the 5.9% estimate.
In monthly terms, the general CPI rose 1% while the underlying rose 0.6% compared to the respective estimates of 0.7% and 0.5%, respectively.
Rising prices for accommodation, petrol and food contributed to the increase.
Energy prices broadly rose by 3.9% from a month ago, bringing the annual gain to 34.6%. Within the category, fuel oil registered a monthly increase of 16.9%, which boosted the 12-month increase to 106.7%.
Housing costs, which account for about a third of the CPI weighting, rose 0.6% during the month, the fastest gain in a month since March 2004. The gain of 5.5 % in 12 months is the most since February 1991.
Finally, food costs rose another 1.2% in May, bringing the year-on-year gain to 10.1%.
This escalation of prices meant that workers received another pay cut during the month. Real wages in line with inflation fell 0.6% in April, although average hourly earnings rose 0.3%, according to a separate BLS statement. In 12 months, the average real hourly earnings fell by 3%.
Markets reacted negatively to the report, with stock futures indicating a sharply downward opening on Wall Street and government bond yields rose.
Some of the largest increases were in air fares (12.6% more in the month), used cars and trucks (1.8%) and dairy products (2.9%). Vehicle costs had been considered an indicator of rising inflation and had been falling over the past three months, so the rise is a potentially disastrous sign, as used vehicle prices have risen by 16 , 1% over the last year. New vehicle prices rose 1% in May.
Friday’s figures dampened hopes that inflation will peak and adds to fears that the US economy is nearing recession.
The inflation report comes with the Federal Reserve in the early stages of a rate hike campaign to curb growth and bring down prices. The May report likely solidifies the likelihood of interest rate hikes of 50 basis points ahead.
“Obviously nothing is good in this report,” said Julian Bridgen, president of MI2 Partners, a global macroeconomic research firm. “There’s nothing to cheer the Fed on. It’s hard for me to see how the Fed can back down.”
With 75 basis points of interest rate hikes already available, markets are widely expecting the Fed to continue tightening its policy year-round and possibly until 2023. Currently, the benchmark short-term debt rate Central bank term is anchored at around 0.75% -1% and is expected to increase to 2.75% -3% by the end of the year, according to CME Group estimates.
Inflation has been a political headache for the White House and President Joe Biden.
Government officials attribute most of the blame to the rising supply chain problems related to the Covid pandemic, the imbalances created by the disproportionate demand for goods over services and the Russian attack on Ukraine. .
In a recent Wall Street Journal article, Biden said he would push for more improvements in supply chains and continue efforts to reduce the budget deficit.
However, both he and Treasury Secretary Janet Yellen have stressed that much of the responsibility for reducing inflation lies with the Fed. The administration has largely denied that the billions of dollars earmarked for Covid aid played a major role.
It remains to be seen to what extent the central bank will have to raise rates. Former Treasury Secretary Larry Summers recently released a white paper with a team of other economists suggesting the Fed will have to go beyond what many anticipate. The article says that the current inflation situation is closer to the situation of the eighties than it seems due to the differences in the ways of calculating the CPI at that time and now.
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