Spike in US inflation fuels debate over economic overheating

US prices rose sharply in May, but much of the increase was due to the rebound from the low prices for goods such as gasoline seen in the early weeks of the Covid-19 pandemic a year ago
US prices rose sharply in May, but much of the increase was due to the rebound from the low prices for goods such as gasoline seen in the early weeks of the Covid-19 pandemic a year ago Andrew CABALLERO-REYNOLDS AFP
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Washington (AFP)

US consumer prices spiked last month, with the inflation rate accelerating to five percent for the year ending May, adding to fears that the American economy's rebound from the Covid-19 pandemic is causing overheating.

The increase was not unexpected, but rather a continuation of the trend seen since January as businesses get back to normal in the world's largest economy after experiencing a sharp downturn a year ago, when the Covid-19 pandemic had forced a halt to much economic activity.

However the May surge was driven largely by spikes in energy and used car prices -- which analysts attributed to separate but temporary factors.

Excluding volatile food and energy goods, the "core" consumer price index (CPI) rose 3.8 percent over the last year, without seasonal adjustment, "the largest 12-month increase since the period ending June 1992," the Labor Department said.

Last month alone, CPI rose 0.6 percent, seasonally adjusted, slower than in April but higher than the consensus forecast. Core CPI increased 0.7 percent.

One third of that rise was due to used cars, which rose 7.3 percent compared to April and are up nearly 30 percent in the latest 12 months, the report said.

Oil prices -- which collapsed and even turned negative last year -- have recovered as the economy has reopened, and the data showed a 56.2 percent surge compared to May 2020.

That jump reflects so-called "base effects" -- the comparison to very low rates, such as those seen last year -- that Federal Reserve officials say will be "transitory" and fade in the coming months.

In fact, the report said gasoline prices fell 0.7 percent in May compared to the prior month.

- Not an inflationary spiral -

Despite repeated assurances from central bankers that they can contain inflation, the rising price pressures have increased concerns that the economy could overheat.

That could force the Federal Reserve to come off the sidelines and raise borrowing costs from their current zero rate.

"These data will not change their conviction that 'transitory' factors and 'bottlenecks' are to blame," Ian Shepherdson of Pantheon Macroeconomics said of the Fed, though he warned wages could continue to face upward pressure, making inflation more persistent than expected.

Signs of the pandemic's continued impact are visible throughout the report, particularly the complications it has caused for supply chains that are struggling to meet renewed demand.

A global semiconductor shortage has hampered auto production, pushing new car prices up 1.6 percent in the month, triple the gain in the prior month.

Meanwhile, as Americans have started to travel, rental car agencies are struggling to replenish their fleets and are not selling off older vehicles, raising prices for used cars. Airline fares jumped seven percent in the month.

"Pretty much all the inflation increases are spikes, from demand pumping up air fares (still below pre-Covid levels) to used cars to car rentals," economist Robert Frick of Navy Federal Credit Union said on Twitter.

"Once the chip supply increases, more new cars, rental fleets restocked, used car prices drop."

James Knightley of ING warned that the booming economy could lead to persistent inflation fueled by rising worker compensation and housing costs, forcing the Fed to back down sooner than expected from the low rate stance it adopted to achieve maximum employment.

"With the economy roaring back, jobs returning and inflation likely to remain higher for longer we continue to see the risks skewed towards an earlier interest rate rise," he said in an analysis.

"The Fed is still saying early 2024, but we think early 2023 is more likely and it could come even sooner."