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US inflation resumes rapid rise by accelerating in May

US consumer price growth surged in May, accelerating 1 per cent, as rising energy and services inflation added urgency to the Federal Reserve’s plans to aggressively tighten monetary policy.

The monthly rise in the consumer price index, published by the Bureau of Labor Statistics on Friday, was significantly higher than the 0.3 per cent increase in April and above economists’ expectations of a 0.7 per cent rise.

The annual rate of inflation rose to 8.6 per cent, the highest level since December 1981.

Stocks sold off sharply on Friday, with the S&P 500 closing down 2.9 per cent in New York and the Nasdaq Composite dropping 3.5 per cent. Short-dated US government bonds, which are most sensitive to monetary policy changes, sold off sharply as well. The yield on the two-year Treasury note climbed above 3 per cent, the highest level since 2008.

Once volatile items such as food and energy are stripped out, “core” CPI rose 0.6 per cent, maintaining the same momentum as the previous month. Prices across other categories in May were 6 per cent higher than at the same time last year.

Services inflation, ex-energy expenses, rose 0.6 per cent for the month, and are up 5.2 per cent on the year.

“There is no denying that when you look at this report, it looks like inflationary pressures remain elevated and there appears to be no immediate relief in sight,” said Pooja Sriram, an economist at Barclays. The bank on Friday said the Fed would raise rates by 0.75 percentage points at its policy meeting next week. Traders have priced in a 50 per cent chance of that outcome.

Chart showing the change in the US Consumer Price index

The monthly increase in inflation is likely to stay elevated because of high energy costs, with national petrol prices approaching $5 a gallon and a steady rise in services-related costs — such as those linked to the travel industry. These gains have offset a moderation in expenses for certain goods.

Sriram said it was hard to pinpoint 8.6 per cent as the peak, warning that “one swing” in energy prices could push the headline inflation rate to 8.8 per cent over the next few months.

Elevated inflation has become the biggest economic challenge for president Joe Biden, whose efforts to engineer one of the fastest labour market recoveries in US history have been overshadowed by the toll that soaring prices have taken on American households, with consumer sentiment falling to a record low in June. The University of Michigan survey also showed five- to 10-year inflation expectations jumping 0.3 percentage points to 3.3 per cent.

Biden on Friday sought again to pin the blame on Russia’s president Vladimir Putin, linking the increase in petrol prices to the Ukraine war.

“Prices at the pump are a major part of inflation, and the war in Ukraine is a major cause of that,” the US president said. He said fighting inflation was his administration’s top economic priority but acknowledged that price pressures were “not coming down as sharply and as quickly as we must see”.

According to the BLS, the “broad-based” increase was driven primarily by a 3.9 per cent rise in energy prices and a 4.1 per cent gain in petrol prices. The latter are up nearly 50 per cent compared with the same time last year.

Food prices notched another 1.2 per cent rise for the month, a pace that has been roughly maintained since December. Over the past 12 months, the so-called food at home index is up 12 per cent, the largest such increase since April 1979. Airline fares continued to rise, increasing 12.6 per cent in May following an 18.6 per cent upsurge the previous month.

Most concerning, according to some economists, was a 0.6 per cent increase in housing costs, the largest monthly rise since March 2004, as rents continued to surge.

Following the data, the so-called five-year break-even rate — a measure of market expectations of inflation in five years’ time — rose to the highest level since May.

The Fed has already committed to moving monetary policy “expeditiously” to a more “neutral” level that no longer stimulates the economy, but further evidence that inflation is becoming more entrenched could compel policymakers to lift interest rates even more forcefully than financial markets expect.

The central bank is expected to implement another half-point rate rise at its meeting next week, having delivered the first since 2000 last month, with another adjustment of that magnitude likely in July.

Lael Brainard, the vice-chair, recently made clear that the Fed could continue the half-point pace into September and would only consider reverting to more typical quarter-point increments following a “deceleration” in monthly inflation prints.

Some analysts have warned that the string of half-point rate rises could be extended even further beyond September.

“If these high prints continue [as] we saw this month and what we are expecting to see in June, that makes a 50 basis point rise in November a distinct possibility,” said Alan Detmeister, an economist at UBS and a former Fed staffer.

Additional reporting by Kate Duguid in New York

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