Numbers: A key measure of US inflation rose sharply again in May and showed prices were rising at the fastest annual rate since 2008, signaling that consumers can expect to pay more for goods and services over the course of summer as the economy recovers from the pandemic.
The PCE price index climbed 0.4% in May to mark the third consecutive large increase, new government figures show. Economists polled by the Dow Jones and the Wall Street Journal expected an increase of 0.5%.
Over the past year, consumer prices have climbed 3.9%, reflecting the largest increase since 2008, when oil prices hit a record high of $ 150 per barrel.
The PCE inflation rate is now almost double the Federal Reserve’s 2% target, but senior officials have played down the increase. Fed officials insist prices will drop next year as the economy returns to normal, most people return to work, and widespread labor and labor shortages. supplies are disappearing.
A separate measure of inflation that excludes food and energy also hit its highest level since 1992.
The core PCE price index rose 0.5% in May. This pushed the increase over the past 12 months to 3.4% from 3.1%.
The PCE is the Fed’s preferred measure of inflation.
Read: The US economy is “very hot”, according to IHS Markit, as is inflation
Big picture: Households are feeling the effects of rising prices when they go to the grocery store, refuel, or try to book a rental at a popular vacation spot. The cost of almost everything seems to be increasing.
Read: Business investment grows at the fastest pace in decades
The Fed is pinning most of the price hike on the reopening of the economy. A surge of pent-up demand has overwhelmed businesses, and in many cases they have raised prices, especially as they are also struggling with shortages of key supplies and even labor.
Read: Unemployment claims barely drop and disappoint for second week in a row
For now, most investors seem to have bought into the Fed’s argument. Stocks are still up and yields on long-term US Treasuries have actually gone down in recent months.
However, some economists fear that the Fed is too lax. They wonder if prices will fall back to 2% in 2022, as the Fed predicts.
The central bank itself has underestimated the rise in inflation. The Fed now expects PCE inflation to average 3.4% in 2021, compared to 1.8% forecast at the end of last year.
Even then, the Fed still predicts that inflation will drop to 2.1% by 2022.
what do they say? “While much of the strength of inflation recently is expected to prove temporary, we expect core inflation to exceed the 2% target through 2022,” wrote the economists of Citibank to customers in a note.
âThis week we heard from over half a dozen speakers from the Fed. Most are optimistic about inflation, but some are getting nervous, âsaid chief economist Chris Low of FHN Financial. “At the moment, there is no way of knowing for sure which group is closest to the truth.”
Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
increased in Friday trades.