US CPI exceeds forecasts, fuels inflation concern

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

The consumer price index climbed 0.6 per cent from the prior month after a 0.8 per cent 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 per cent, according to Labor Department data Thursday.

The gains were fairly broad and driven by steady growth in the costs of used vehicles, household furnishings, airfares and apparel. The median forecast in a Bloomberg survey of economists called for 0.5 per cent gains in both the overall CPI and the core.

Compared with the same month a year ago, the CPI jumped 5 per cent, 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 per cent from 12 months ago, the most since 1992.

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, labor. Shipping bottlenecks, higher input costs and rising wages are challenges to companies looking to protect profit margins.

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 is translating into more services demand - another propellant for inflation.

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 massive fiscal and monetary policy support.

A slew of companies have raised prices or announced plans to do so, including Chipotle Mexican Grill and Reynolds Consumer Products.

Even though orders and backlogs at Hooker Furniture are elevated, "we're cautiously optimistic, considering the industry-wide supply chain logistics and raw materials shortages and inflation," chief executive officer Jeremy Hoff said on the company's June 4 earnings call. "We believe we have mitigated these dynamics as much as possible through surcharges and price increases."

A 7.3 per cent jump in the cost of used cars and trucks accounted for about one-third of the increase in the overall CPI, while new vehicles rose the most since 2009.

Household furnishings advanced 1.3 per cent in May from a month earlier, the largest gain since 1976.

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 last month but remain elevated.

BLOOMBERG