US shopper costs have seen their largest surge in 13 years; Inflation is more likely to have peaked
- Consumer prices rise 0.9% in June
- CPI accelerates 5.4% year over year
- Core CPI up 0.9%; increases by 4.5% year-on-year
- Used cars and trucks account for more than a third of the CPI jump
WASHINGTON, July 13 (Reuters) – US consumer prices rose the fastest in 13 years in June as the economic recovery picked up on supply constraints and an ongoing rebound in the cost of travel-related services from pandemic-induced levels.
With used cars and trucks accounting for more than a third of the rise in prices reported Tuesday by the Department of Labor, economists continued to believe the higher inflation was temporary, consistent with longstanding views of Federal Reserve Chairman Jerome Powell.
The benchmark ten-year Treasury bond yield spiked briefly before falling as investors concluded the US Federal Reserve was likely to stick to its ultra-loose monetary stance for a while. Powell will present the biannual monetary policy report to the US Congress on Wednesday.
“The June CPI numbers looked scary, but once again we see that it was mostly temporary price increases that drove the numbers up,” said Robert Frick, business economist with the Navy Federal Credit Union in Vienna, Virginia. “Overall, this report is consistent with the slowdown in inflation later this year.”
The consumer price index rose 0.9% last month, the largest increase since June 2008, after rising 0.6% in May. Economists polled by Reuters had forecast the CPI to rise 0.5%. The prices for used cars and trucks rose by 10.5%. That was the biggest jump since January 1953, when the government started tracking the series. Used cars and trucks have been the main driver of inflation in recent months.
They rose year-on-year by a record 45.2%. A global semiconductor shortage has undermined automobile production. New car prices also rose solidly. Demand is mainly driven by rental companies desperately looking to unload their fleets at the height of the pandemic. Industry data indicate that used car and truck prices will soon cool down.
However, there are signs that inflation is spreading beyond the sectors at the center of the economy reopening as consumers paid more for food, gasoline, rents and clothing over the past month. That could heighten criticism of the very expansionary monetary and fiscal policy. COVID-19 vaccinations, low interest rates, and nearly $ 6 trillion in government relief efforts since the U.S. pandemic began in March 2020 are fueling demand and straining the supply chain.
White House officials are cautiously optimistic that the current price hike will be temporary, citing a continued decline in forward prices for lumber and other goods, which have risen sharply due to supply chain bottlenecks. The steel capacity has also increased significantly in recent months, it said.
In the 12 months to June, the CPI was up 5.4%. This was the largest increase since August 2008 and followed a 5.0% increase in May. Excluding the volatile food and energy components, the CPI accelerated 0.9% after rising 0.7% in May. The so-called core CPI rose 4.5% year-on-year, the largest increase since November 1991, after rising 3.8% in May.
Wall Street stocks were mixed. The dollar gained against a basket of currencies. Longer-term US Treasury bond prices rose.
The US Federal Reserve cut its key rate for overnight money to almost zero last year and is pumping money into the economy through monthly bond purchases. It has signaled that it could tolerate higher inflation for some time to make up for years when inflation was below its target of 2%, a flexible average.
The Fed’s preferred measure of inflation, the core consumer spending index, rose 3.4% in May, the largest increase since April 1992. June, released last week, showed that “a sizeable majority” of officials saw inflation risks “tipped up” and the central bank as a whole felt it needed to be ready to act should those risks materialize. Continue reading
Annual inflation rates were boosted by the decline in the weak values from the CPI calculation last spring. June was likely the peak of these so-called base effects.
“The fact that the recent surge in inflation has been dominated by a few categories should continue to give Fed leadership confidence in their view that it is mainly a temporary surge, a view that the market appears to share,” said Michael Feroli , Chief US Economist at JPMorgan in New York.
With nearly 160 million Americans vaccinated, the demand for travel is growing. Off-home accommodation, including hotel and motel accommodation, increased 7.9%. Flight ticket prices rose 2.7%. Although inflation is likely to have peaked, it is expected to remain elevated through 2022 as prices for many travel-related services are still below pre-pandemic levels.
However, some factors driving inflation could persist well beyond the next year. Rents rose solidly in June and could rise as workers return to offices and people retreat to cities and other urban centers amid the waning US pandemic.
Even when millions of Americans are unemployed, a labor shortage is seen driving wages high and inflation high. The lack of affordable childcare keeps some parents at home. The pandemic also forced early retirement, which reduced the labor pool.
“It’s hard to argue that in a few months everything will be back to normal,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles. “The rent will not stay tame when the government eviction restrictions are over. The housing shortage will continue to drive rents up.”
However, the course of inflation is likely to be determined by consumer and business perceptions.
“The big concern is that current high inflation will be built into consumer and business expectations, leading to higher long-term inflation, as it was in the 1970s,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh , Pennsylvania. “However, the transitory nature of current inflationary pressures and the Fed’s vigilance should prevent this from happening.”
Reporting by Lucia Mutikani; Additional reporting by Andrea Shalal; Editing by Paul Simao and Andrea Ricci
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