Shoppers in New York, the US, March 25 2021. Picture: JEENAH MOON/REUTERS
Shoppers in New York, the US, March 25 2021. Picture: JEENAH MOON/REUTERS

Prices paid by US consumers rose in May by more than forecast, extending a months-long build-up in inflation that risks becoming more established as the economy strengthens.

The consumer price index climbed 0.6% from the prior month after a 0.8% jump in April that was the largest since 2009. Excluding the volatile food and energy components, the so-called core CPI rose by a larger-than-forecast 0.7%, according to  labor department data on Thursday.

The gains were fairly broad and driven by steady growth in the costs of used vehicles, household furnishings, airfares and apparel. The increase in previously owned cars and trucks accounted for about one-third of the total monthly advance in the CPI, the department said.

Price pressures continue to build across the economy as businesses scramble to balance a rush of demand against shortages of materials and, in some cases, labour. Shipping bottlenecks, higher input costs and rising wages are challenges to companies looking to protect profit margins.

Compared with the same month a year ago, the CPI jumped 5%, the largest annual gain since August 2008, though the figure remains distorted by the base effect. The comparison to the pandemic-depressed index in May 2020 makes year-over-year inflation appear stronger.

The core measure rose 3.8% from 12 months ago, the most since 1992.

However, underscoring the clear acceleration in inflation more recently, the core CPI over the past three months has increased at a 5.2% annualized pace, the fastest since 1991.

Robust demand

Strong consumer spending on merchandise — in part driven by government stimulus — has led to growing orders backlogs and lean inventories. The lifting of pandemic restrictions, increases in vaccinations and a flurry of social activity are translating into more services demand — another propellant for inflation.

“The May CPI report shows reopening-sensitive categories dominating price pressures for a second straight month,” Bloomberg economists Andrew Husby and Yelena Shulyatyeva said after the release.

The question economists and investors are wrestling with is whether these factors will have a temporary impact on inflation as the Federal Reserve expects or whether they will become more ingrained against a backdrop of huge fiscal and monetary policy support.

The yield on the 10-year Treasury rose after the report, topping 1.5%. The dollar was little changed and the S&P 500 advanced. Separate figures showed applications for state jobless benefits declined for a sixth straight week.

Fed chair Jerome Powell has said upward pressure on prices is likely to be temporary, noting in late April that “in an episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation into the future”.

Others disagree, citing trillions of dollars in fiscal support, the likely persistence of product shortages and rising labour costs. Bond market expectations for the pace of inflation over the next five years have been easing from a 15-year high in May but remain elevated.

“The frothiness in CPI continues for now but between base effects and pent-up demand pressures, it is probably not giving a definite answer to the great inflation debate, and you need to read the bond market tea leaves,” said Anu Gaggar, senior global investment analyst at Commonwealth Financial Network.

While wage growth has blown past economists’ estimates in the past two monthly jobs reports, the rise in consumer prices has taken a sizeable toll. Inflation-adjusted average hourly earnings declined 0.2% in May after a 0.1% drop, separate data showed on Thursday. The retreat in real earnings, if it persists, could prompt workers to ask for a bump in pay.

Shelter costs, which make up a third of the overall CPI, rose 0.3% after rising 0.4%. The increase included a 0.4% gain in hotel costs and a 0.3% increase in owners equivalent rent (OER).

“While transitory factors did a lot of the heavy lifting driving the May upside, the more persistent components like rents and OER firmed up as well much more than expected, pointing to a firmer source of foundation for the inflation data as the transitory factors begin to fall out of the figures,” economists at Morgan Stanley said in a note.

Bloomberg News. More stories like this are available on bloomberg.com

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