However, she cautioned that price increases tied to the reopening and supply chain bottlenecks would keep inflation “elevated and sticky as supply/demand imbalances are only gradually resolved”. “We believe this will be the peak in the annual rate of inflation as the strong base effects subside in the coming months,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. Federal Reserve policymakers have been more tolerant of inflation partly because consumer prices were subdued for so long despite loose monetary policy.
While the surge in prices can partly be attributed to the low levels of inflation at the start of the coronavirus pandemic, Thursday’s report showed broad increases, driven by the increasing cost of flights, household furnishings and operations, new cars, rental cars and apparel as the US economy reopens. On a monthly basis, consumer prices rose 0.6 per cent, following a 0.8 per cent increase in April. Core CPI increased 0.7 per cent.
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. An underlying measure of inflation that strips out volatile items like food and energy, so-called core CPI rose 3.8 per cent in May on an annual basis — the most since 1992 — after a 3 per cent rise in April.
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. Recommended
While the Fed will probably stick to that view at next week’s Federal Open Market Committee meeting, “with doubts starting to creep in from various Fed officials we suspect the Jackson Hole Conference in late August could be very interesting,” said James Knightley, chief international economist at ING, referring to the annual gathering of central bankers and economists hosted by the Kansas City Fed. 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 despite recent increases.
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