Inflation unexpectedly hit a new 40-year high in May as gas, food and rent prices surged, underscoring that its anticipated decline could be painfully slow.
The consumer price index increased 8.6% annually, the largest rise since December 1981, the Labor Department said Friday. Economists had predicted inflation would hold steady at 8.3%.
On a monthly basis, consumer prices increased 1%, compared to a 0.3% rise the prior month.
After inflation eased off its recent four-decade high in April, economists thought it had begun a grindingly slow descent. May’s return to historic levels reveals just how intractable inflation has become as a broad range of goods and services rose sharply.
“The inflation slowdown through year-end will be anything but steep,” Gregory Daco, chief economist at EY-Parthenon, wrote in a note to clients.
Gas prices increased 4.1% and 48.7% annually while grocery prices rose 1.4% and 11.9% over the past year. Russia’s war in Ukraine continued to curtail global supplies of oil, wheat, corn and other commodities and to extend supply chain troubles.
Last month, prices rose 3.1% for cakes, cupcakes and cookies and 2.2% for fish. Egg prices increased 5% following a 10.3% jump in April and chicken costs advanced 3% for the second straight month as both items surged at least partly because of a recent bird flu outbreak.
Core prices, which exclude volatile food and energy items, increased 0.6% for the second straight month. That lowered the annual rise to 6% from 6.2% in April.
Rent climbed 0.6% and 5.2% over the past year. The sharp rise in home prices during the pandemic spurred owners to hike rents to maintain profits.
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The report bolsters the Federal Reserve’s plans to raise its key interest rate by half a percentage point at both its meeting next week and its gathering in July as part of an aggressive bid to curb inflation. The campaign has led to a brutal stock market sell-off and pushed mortgage rates sharply higher, dampening the housing market.
“This report kills any last vestiges of hope that the Fed could pivot to” a quarter point hike in July, says economist Ian Shepherdson of Pantheon Macroeconomics.
Stocks plunged after the report was released. The Dow Jones Industrial Average was down by 787 points as of 10:15 a.m. and the S&P 500 was down 104 points, putting it just shy of bear market territory, equivalent to a 20% fall since the index hit an all-time high in January.
Supply chain gridlock begins to ease
There is some good news, however in the latest numbers.
Consumer purchases have started shifting from goods to services, such as dining out and traveling, now that the pandemic is broadly easing.
Also, many port, factory and trucking employees are coming back to work and China is easing COVID-related lockdowns, mitigating the supply chain bottlenecks behind much of the inflation spike.
And retailers that ordered too much inventory to cope with the supply snarls are heavily discounting some items.
As a result, prices of goods are rising more slowly or dipping in some cases as shoppers scale back their pandemic-fueled shopping binges. Last month, prices fell 0.2% for furniture, 0.7% for appliances and 4.1% for TVs.
But used car prices, which fell the prior two months after skyrocketing during the health crisis, jumped 1.8% and 16.1% annually. New car prices rose 1% and 12.6% yearly.
Meanwhile, strong demand for travel and other leisure activities as the pandemic fades is pushing up a different set of costs. Air fares leaped 12.6% and are up 37.8% the past year. And hotel rates rose 0.9% and 19.3% annually.
Inflation is still headed lower this year, Shepherdson says, as supply problems ease and wage growth continues to moderate, especially in labor-intensive industries such as restaurants and hair stylists.
Contributing: Elisabeth Buchwald