Inflation Sped Up Again in May, Dashing Hopes for Relief

A surge in prices in May delivered a blow to President Biden and underscored the immense challenge facing the Federal Reserve as inflation, which many economists had expected to show signs of cooling, instead reaccelrated to climb at its fastest pace since 1981

Consumer prices rose 8.6 percent from a year earlier and 1 percent from April, which was more rapid than economists had expected. The pickup partly reflected surging gas costs, but even with volatile food and fuel prices stripped out, it was still a brisk monthly rate.

Friday's Consumer Price Index report offered more reason for worry than comfort for Fed officials who are watching for signs that inflation is cooling on a monthly basis as they try to guide price increases back down to their goal Rents, gas, used cars and food are all becoming more expensive, making this bout of inflation painful for consumers and suggesting that it might have staying power. Policymakers aim for 2% inflation over time using a related index.

The Fed is already trying to cool the economy by raising borrowing costs and the quick pace of inflation makes it more likely that they will have to do more. The central bank is expected to raise rates twice in July. Friday's data led a number of economists to pencil in another rate increase in September. A recession is more likely if the Fed is more active.

The data shows that the Fed has more to do to bring down inflation. It was strong across the board and higher than we expected.

Markets fell after the Labor Department released the report. The S&P 500 dropped by more than 3%. The two-year Treasury note's yield rose to 3.06 percent, its highest level in six years, as the yield on short-term government bonds rose sharply.

A sour economic mood is caused by high inflation and the Fed's attempts to control it. Consumer confidence plummeted to a new low in a report out Friday as households were hit with higher prices. Wall Street economists and small-business owners are worried about a recession in the next year, and President Biden's approval ratings have suffered.

The fact that inflation shows little sign of abating will be a problem for Mr. Biden and the Democrats. The administration has made it clear that helping to return inflation to a more sustainable pace is their top priority, but that doing so mostly falls to the Fed

It could take a long time for inflation to be brought down. Products like cars and trucks are in short supply because of the production and shipping snarls caused by the swine flu. Food and fuel prices are going up because of the war in Ukranian. Consumer demand remains strong despite the fact that wages are rising robustly and not enough to completely offset inflation.

Sarah Watt House is an economist at Wells Fargo. There isn't much inflation relief in the near future.

In a statement after the release, Mr. Biden emphasized that prices are increasing around the world and that inflation is a top priority.

He said that his administration would do everything it could to lower prices. There is work to be done to get inflation down.

Even though important Fed policymakers have shown little appetite for such a drastic move, Friday's numbers increased speculation that the Fed may raise rates by 0.75 percentage points in the months ahead.

"We think the U.S. central bank has good reason to surprise markets by hiking more aggressively than expected in June."

There was a chorus of speculation that showed how bad the consumer price news was. The measure of where households think prices will be five years from now hit its highest reading since 2008.

Fed officials are likely to pay attention to Friday's report for clues about the future. A portion of the May price increase was due to a continued pickup in goods prices. Pre-owned vehicle costs went up more than expected and were up more than 15 percent from a year ago. The price of a new car was up.

Travel was one of the industries affected by the Pandemic. After years of being stuck at home, people have been taking vacations and airfares have gone up. The price of a hotel stay is more than last May.

The inflation figures were affected by the war in Ukranian. Russia's invasion has made things worse by disrupting Ukrainian grain shipments in ways that have trickled through the global market. Gas prices began to rise before the invasion but have now increased due to it.

Friday's report showed signs of a stickier kind of inflation, one that could be harder to stamp out.

The rent-tied measure of housing costs for people who own their homes accelerated as rents rose sharply. The housing index makes up a third of the overall inflation and can put pressure on it in the months to come.

A recent jump in rents on new leases tracked by private data providers means housing costs will likely continue to climb for some time as renters face higher market costs. There is a chance that higher mortgage rates will make it harder for people to buy a home.

Rents are increasing at a strong clip because of the tight rental market, according to the chief economist at Apartment List.

The new data may offer some hope for the Fed and the White House. Audio and visual products like TVs are getting cheaper again, as the prices that had been rising last year are now dropping. The gauge without food and energy costs moderated to 6 percent on an annual basis.

The figures are being measured against last year's high readings because inflation had risen in May. Even if prices are climbing month to month, the base effect makes annual gains look less impressive.

While the White House has been instituting policies that might help families with inflation around the edges by improving supply or offsetting costs, the task of cooling down consumption falls to the central bank.

Spending is not showing signs of cracking so far. Travelers continue to book trips even as the cost of vacations goes up.

Anthony G. Capuano, the chief executive of Marriott International, said during Tuesday's event that the hotel company is seeing "extraordinary pricing power."

Households have accumulated big savings over the last few years, first as they stayed home in the Pandemic and later as the government sent out relief money into 2021. Poor families have been drawing down their checking accounts, but balances are still elevated for richer households.

Matthew Luzzetti is an economist atDeutsche Bank. Wages are not keeping up with inflation, but cash buffer could help families with higher prices and interest rates

What's the upshot? The peak is still ahead of us when it comes to headline inflation.

Lydia and Ana were involved in the reporting.