Inflation soars in May to an annual rate of 5%, testing the markets and the Fed | Economy

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Inflation soared in May at an annual rate of 5%, the largest annual increase since August 2008.

The monthly rise is due to rising prices for used cars, food, furniture, air fares and clothing, the Bureau of Labor Statistics reported Thursday. Energy prices were unchanged in May.

Core inflation, which excludes food and energy, rose 3.8% in the last year, the largest annual increase since June 1992, driven by a 28.5% rise in costs energy and 2.2% of food prices.

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The annual number was well above the 2% comfort range the Federal Reserve has set for itself. The central bank has indicated it will tolerate a higher rate as the labor market continues to recover from the coronavirus pandemic. But markets fear that if consumer expectations for inflation are confirmed, it may be more difficult to meet them.

Buying into inflation is a transitory problem, Joe LaVorgna, Natixis chief economist for the Americas wrote in a note to clients on Thursday that the past three quarters have seen U.S. gross domestic product increase at an annualized rate of 14% with projections for the current quarter at ten%. “Is the GDP or inflation going to increase,” he asked. “No, we have achieved peak growth rates and the bond market is discounting itself as such.”

The Fed is expected to begin reviewing its policy of purchasing treasury bills and mortgage-backed securities soon, which has kept interest rates low and supported the stock market. And even though more than 9 million people remain unemployed, companies report difficulties finding workers and have been forced to raise wages to attract candidates. On Tuesday, the government announced that employers created 1 million new openings in May, bringing the total number of open jobs to a record 9.3 million.

“Fed officials have made it clear that they expect these base effects will simply set in as the economy overtakes wild swings in costs associated with the pandemic, and pressure from the bottlenecks of the economy. ‘supply and a shift in US spending patterns reverting to pre-pandemic trends are normalizing,’ Stifel Chief Economist Lindsey Piegza wrote in May after inflation rose 4.2% in April.

“Part of this is just the nature of experiencing a global pandemic, however, the recent price hike complicates the current political environment as Fed officials struggle to sort through volatility and decipher fluctuations. temporary versus lasting trends, ”Piegza added. “Of course, only the latter will lead to a policy adjustment.”

Ahead of the US inflation report, the European Central Bank said it would leave interest rates unchanged and maintain its asset purchase program.

“The Governing Council expects the ECB’s key interest rates to remain at their current or lower levels until it has seen the inflation outlook converge sharply to a sufficiently close level, but below 2% within its projection horizon, and this convergence has been consistently reflected in the underlying dynamics of inflation, ”the bank said in a statement.

Meanwhile, global economies continue to recover, with G-20 group of advanced industrialized countries declaring gross domestic product return on Thursday to pre-pandemic levels in the first quarter of 2021.

The GDP of the G-20 countries grew 0.8% in the first quarter, compared to the fourth quarter of 2020, according to the Organization for Economic Co-operation and Development. On an annual basis, GDP growth at 3.4% in the first quarter of 2021, after contracting 0.7% in the previous quarter.

China, the source country of the coronavirus, recorded the highest annual growth rate of 18.3%, while the UK recorded the largest decline at minus 6.1%.

Meanwhile, the number of first-time jobless claimants continued to decline last week, falling to 376,000 from the previous week’s level of 385,000. That number is the lowest since March 14, 2020, so it stood at 256,000. The four-week moving average was 402,500, a decrease of 25,500 from the previous week’s 428,000, which was also the lowest level since March 14, 2020 , while it was 225,500.

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