Inflation took a fresh swipe at American consumers in May, with the consumer price index surging by 5 percent over the past year, the biggest annual spike in the measure since 2008.
On a monthly basis, May consumer prices rose by 0.6 percent from April, Labor Department figures showed, a slight drop from 0.8 percent the prior month, which was the biggest gain since June 2009.
The sharp jump in the year-over-year inflation number is partly due to the base effect, which is the idea that last spring pandemic lockdowns and the plunging economy pushed inflation to an abnormal low. The base effect is expected to level off in June.
While economists polled by Reuters predicted the annual consumer price index to rise by 4.7 percent and the monthly reading to come in at 0.4 percent in May, markets generally shrugged off inflation running hotter than expected. U.S. stocks opened higher, and while the interest rate on the benchmark 10-year Treasury note and the gold spot price initially ticked up, both quickly fell back down and remained largely flat at the time of reporting.
The muted market reaction is likely informed by repeated statements by Fed officials that they believe the price rise to be transitory and are willing to tolerate higher rates of inflation for some time to offset years in which it was lodged below its average target of 2 percent.
The Fed’s preferred inflation gauge, the so-called core personal consumption expenditures (PCE) gauge, which excludes the volatile food and energy components, rose 3.1 percent in April, the biggest jump since 1992. May’s PCE inflation number is scheduled for release on June 25.
“We have not yet seen the peak in inflation, but that should occur in the current quarter, though existing pressures should keep the year-over-year pace elevated for the remainder of 2021,” said Sam Bullard, a senior economist at Wells Fargo.
“We expect inflation to slow more discernibly over the latter half of 2022, but with inflation expectations continuing to firm, core PCE inflation is expected to remain above 2.0 percent through our forecast horizon,” Bullard added.
While the inflationary pressures are putting a squeeze on consumers, some economists fear that, if inflation turns out to be more persistent, this may force the Fed to raise rates aggressively and dampen the economic recovery.
Others worry that if prices accelerate too fast and stay high for too long, expectations of further price increases will take hold, driving up demand for wages and potentially triggering the kind of wage-price spiral that bedeviled the economy in the 1970s.
“The market is starting to worry that the Fed may be going soft on inflation, and that could let the inflation genie out of the bottle,” said Sung Won Sohn, a professor of economics and finance at Loyola Marymount University in Los Angeles.
Reuters and The Associated Press contributed to this report.