US consumer price inflation rose in May, accelerating by 1% as rising energy and services inflation added urgency to the Federal Reserve’s plans to aggressively tighten monetary policy.
The monthly growth of the consumer price index, published by the Bureau of Labor Statistics on Friday, was significantly higher than the 0.3 per cent increase in April and above economists’ expectations for a 0.7 per cent rise.
The annual inflation rate rose to 8.6 percent, the highest level since December 1981.
Shares sold out sharply on Friday, with the S&P 500 down 2.4% by mid-afternoon in New York and the Nasdaq Composite down more than 3%. US short-term government bonds, which are most sensitive to changes in monetary policy, also sold out sharply. Yields on two-year government bonds fell to 3 percent, the highest level since 2008.
After variable products such as food and energy were removed, the “core” CPI increased by 0.6%, maintaining the same momentum as the previous month. Prices in other categories in May were 6 percent higher than at the same time last year.
Inflation in services, excluding energy costs, increased by 0.6% for the month and was 5.2% higher for the year.
“There is no denying that when you look at this report, inflationary pressures seem to remain high and there seems to be no immediate relief,” said Puja Sriram, an economist at Barclays. The bank said on Friday that the Fed would raise interest rates by 0.75 percentage points at its policy meeting next week. Traders have estimated a 50% chance of this result.
The monthly increase in inflation is likely to remain high due to high energy costs, with national gasoline prices approaching $ 5 per gallon and a steady increase in service costs, such as those in the tourism industry. These profits compensate for the reduction in the cost of certain goods.
Shriram said it was difficult to set 8.6% as the peak, warning that “fluctuations” in energy prices could push core inflation to 8.8% over the next few months.
Rising inflation has become the biggest economic challenge for US President Joe Biden, whose efforts to create one of the fastest labor market recoveries in US history have been overshadowed by the damage that rising prices have done to US households, such as consumer moods fell to a record. low in June. A study from the University of Michigan also showed that expectations for inflation in 5 to 10 years jumped by 0.3 percentage points to 3.3 percent.
On Friday, Biden again tried to shift the blame on Russian President Vladimir Putin, linking rising gasoline prices to the war in Ukraine.
“Pump prices are a major part of inflation, and the war in Ukraine is the main reason for that,” he said. He said fighting inflation was his administration’s top economic priority, but acknowledged that price pressures “are not declining as sharply and as fast as we should see”.
According to the BLS, the “wide-ranging” increase was mainly due to a 3.9% increase in energy prices and a 4.1% increase in petrol prices. The latter increased by nearly 50% compared to the same period last year.
Food prices rose another 1.2% for the month, a pace that has remained around since December. In the last 12 months, the so-called home food index has risen 12 percent, the largest such increase since April 1979. Airline ticket prices continued to rise, rising 12.6 percent in May after rising 18.6 percent in the previous month.
According to some economists, the most worrying is the 0.6% increase in housing costs, the biggest monthly increase since March 2004 as rents continue to rise.
After the data, the so-called profitable rates – a measure of market expectations for inflation in five and 10 years – rose to their highest level since May.
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The Fed is already committed to moving monetary policy “expeditiously” to a more “neutral” level, which no longer stimulates the economy, but further evidence that inflation is rising may force politicians to raise interest rates even more, than financial markets expect.
The Fed is expected to apply another half-point rise in interest rates at its meeting next week, making the first of 2000 last month, with another adjustment of this magnitude likely in July.
Vice President Lael Brainard recently made it clear that the Fed could continue at a half-point pace in September and will only consider returning to more typical quarter-point increases after a “slowdown” in monthly inflation.
Some analysts have warned that a series of half-point interest rate hikes could be extended beyond September.
“If these high prints continue [as] we saw this month and what we expect to see in June, which makes a 50-point rise in November a clear possibility, “said Alan Detmeister, an economist at UBS and a former Fed employee.
Additional reports from Kate Duguid in New York
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