Inflation rose at a faster rate in May than any time since the Great Recession, as consumers face higher prices for everyday goods and services and Republicans blame President Joe Biden’s free-spending policies.
In its report Thursday, the government said that overall consumer prices rose 0.6 percent in May, bringing the annual inflation rate to 5 percent, the highest level since August 2008.
Core inflation, which excludes volatile energy and food costs, rose 0.7 percent in May after an even bigger jump in April, and is up 3.8 over the past 12 months, the quickest rate since 1992.
Republicans blame the sharp rise in inflation on lax monetary policy and freewheeling stimulus spending by the Biden administration, which has proposed a record $6 trillion federal budget for the next fiscal year.
‘President Biden’s inflation crisis is here and it’s devastating for our poorest families,’ Senator Rick Scott, a Florida Republican, said in response to the new data.
‘It’s time to end the madness. It’s clear we cannot rely on Joe Biden and the Democrats to stand up and protect American families,’ said Scott, who is pushing a bill to slash government spending.
‘Inflation is up 5%—and Biden wants to spend $6 trillion more to see how high it will go,’ tweeted Senator Tom Cotton, an Arkansas Republican.
Though the new inflation measure exceeded economists’ forecasts, Fed Chair Jerome Powell has repeatedly insisted that higher inflation will be transitory, and it was unclear whether the new data would prompt a reassessment of monetary policy.
The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and continues to flood the economy with money through monthly bond purchases.
The 12-month price change of all items in selected categories is seen in the chart above. Inflation rose at a faster annual rate in May than any time since the Great Recession
People walk through a shopping area in Manhattan on Monday. The reopening surge is driving prices higher for consumers
Republicans blame President Joe Biden’s free spending policies, including his record proposal for a $6 trillion federal budget
Others say the increased consumer demand post-pandemic is bumping up against a shortage of components, from lumber and steel to chemicals and semiconductors, that supply such key products as autos and computer equipment, all of which has forced up prices.
The sharp rise in consumer prices reflected a range of goods and services now in growing demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly reopening economy.
And as consumers increasingly venture away from home, demand has spread from manufactured goods to services – airline fares, for example, along with restaurant meals and hotel prices – raising inflation in those areas, too.
A labor shortage has also contributed to rising prices, as companies continue to offer high wages and incentives to lure reluctant workers back into the job market.
From the cereal maker General Mills to Chipotle Mexican Grill to the paint maker Sherwin-Williams, a range of companies have been raising prices or plan to do so, in some cases to make up for higher wages that they’re now paying to keep or attract workers.
Average prices for eggs (dark blue), milk (red) and ground beef (light blue) are seen over the past 20 years in the chart above
The core inflation measure for urban consumers is seen above rising sharply in May
Shoppers are seen at a Vermont Costco last month. The sharp rise in consumer prices reflected a range of goods and services now in growing demand
Used cars sit on the sales lot at Frank Bent’s Wholesale Motors in El Cerrito, California in March. Used car prices have surged 17 percent during the pandemic and are contributing to inflation
Inflation saps the value of your dollar: This is how it works
Have you ever been shopping and noticed that the prices of things you typically buy have gone up? If the items in your shopping basket cost $100 last year and now they cost $105, at a very basic level, that’s inflation.
Prices are changing all the time but we don’t say there is inflation every time we see a price increase.
Instead, we say there is inflation when the prices of many of the things we buy rise at the same time and then continue to rise.
So how can we tell when inflation is happening and by how much? We do so by looking at the prices of many items over time.
Government statistical agencies regularly gather information about the prices of thousands of goods and services.
They then organize the prices into categories such as ‘transportation’ and ‘apparel,’ they combine the prices in each category, and they report the results in various price indexes.
Price indexes are just collections of prices.
For example, some indexes contain the prices of items that consumers buy, and others contain the prices of items that businesses buy.
Others contain prices only for goods, while others contain prices only for services, and so on.
If the level of an index is higher now than it was a month or year ago, it tells us that the prices contained in that index are higher on average, which tells us there is inflation.
Source: Federal Reserve Bank of Cleveland
The inflation pressures, which have been building for months, are not only squeezing consumers but also posing a risk to the economy’s recovery from the pandemic recession.
One risk is that the Federal Reserve will eventually respond to intensifying inflation by raising interest rates too aggressively and derail the economic recovery.
The Fed, led by Chair Jerome Powell, has repeatedly insisted that inflation will prove temporary as supply bottlenecks are unclogged and parts and goods flow normally again.
But some economists have expressed concern that as the economic recovery accelerates, fueled by rising demand from consumers spending freely again, so will inflation.
‘The price spikes could be bigger and more prolonged because the pandemic has been so disruptive to supply chains,’ Mark Zandi, chief economist at Moody’s Analytics, said in advance of Thursday´s inflation report.
But ‘by the fall or end of the year,’ Zandi suggested, ‘prices will be coming back to earth.’
That would be none too soon for consumers like Carmela Romanello Schaden, a real estate agent in Rockville Centre, New York. Schaden said she´s having to pay more for a range of items at her hair salon. But she is feeling the most financial pain in the food aisle. Her monthly food bill, she said, is now $200 to $250 for herself and her 25-year-old son – up from $175 earlier in the year.
A package of strip steak that Schaden had normally bought for $28 to $32 jumped to $45. She noticed the increase right before Memorial Day but bought it anyway because it was for a family picnic. But she won´t buy it again at that price, she said, and is trading down to pork and chicken.
‘I´ve always been selective,’ Schaden said. ‘When something goes up, I will switch into something else.’
So far, Fed officials haven´t deviated from their view that higher inflation is a temporary consequence of the economy´s rapid reopening, with its accelerating consumer demand, and the lack of enough supplies and workers to keep pace with it. Eventually, they say, supply will rise to match demand.
Officials also note that year-over-year gauges of inflation now look especially large because they are being measured against the early months of the pandemic, when inflation tumbled as the economy all but shut down. In coming months, the year-over-year inflation figures will likely look smaller.
Still, last month, after the government reported that consumer prices had jumped 4.2% in the 12 months ending in April, Fed Vice Chair Richard Clarida acknowledged; ‘I was surprised. This number was well above what I and outside forecasters expected.’
And the month-to-month readings of inflation, which aren´t subject to distortions from the pandemic have also been rising since the year began.
Some economists say they fear that if prices accelerate too much and stay high too long, expectations of further price increases will take hold. That, in turn, could intensify demands for higher pay, 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.
Shoppers crowd the South Coast Plaza mall in Costa Mesa, California last month. Surging consumer demand is bumping up against labor and commodity shortages to drive up prices
Passengers are seen at the Houston airport last month. The surge in travel, dining and entertainment as pandemic restrictions lift has driven increased demand
In April, the price of used cars and trucks jumped a record 10 percent. Hotel and motel prices also set a monthly record. Tickets for sporting events and home furniture surged, too, along with TVs, audio products and smart home devices. So did the cost of toys, games and playground equipment. Fares for Uber and Lyft are up, too.
Rising commodity costs are forcing Americans to pay more for items from meat to gasoline. Prices for corn, grain and soybeans are at their highest levels since 2012. The price of lumber to build homes is at an all-time high.
More expensive commodities such as polyethylene and wood pulp have translated into higher consumer prices for toilet paper, diapers and most products sold in plastic containers.
Half of the 50 states are refusing a federal boost to unemployment benefits in an effort to push jobless workers back into the job market. A labor shortage is contributing to inflation
This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4% to cover the cost of raising its workers´ wages as the chain tries to attract more employees
General Mills has said it´s considering raises prices on its products because grain, sugar and other ingredients have become costlier. Hormel Foods has already increased prices for Skippy peanut butter. Coca-Cola has said it expects to raise prices to offset higher costs.
Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will be raising prices on about 60 percent of its products. Proctor & Gamble has said it will raise prices for its baby, feminine and adult care products.
This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4 percent to cover the cost of raising its workers´ wages.
In May, Chipotle had said that it would raise hourly wages for its restaurant workers to reach an average of $15 an hour by the end of June.
‘There is stronger demand for hotel rooms, air travel, restaurant dining,’ said Gus Faucher, chief economist at PNC Financial. ‘Many businesses are also facing upward pressure on their costs such as higher wages.’
Gregory Daco, chief U.S. economist at Oxford Economics, noted that in some cases, a jump in the price of goods such as autos is raising the price of car rental services.
‘It is going to be a muggy summer on the inflation front,’ Daco said. ‘There will be a pass-through from higher goods prices to higher prices for services.’
Developing story, check back for updates.