WASHINGTON – American consumers absorbed another surge in prices in May – a 0.6% increase from April and 5% from last year, the biggest 12-month inflation spike since 2008.
The May consumer price surge, reported by the Labor Department on Thursday, reflected a range of goods and services that are now increasingly in demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly opening economy take part.
Increased consumer appetites are met by a shortage of components, from lumber and steel to chemicals and semiconductors that supply key products such as automobiles and computer equipment, which has all driven prices up. And as consumers increasingly move away from home, demand has expanded from manufactured goods to services – for example, airfare along with restaurant meals and hotel rates – driving inflation in those areas too.
In its Thursday report, the government said core inflation, which excludes volatile energy and food costs, rose 0.7% in May, after rising even sharper in April, and rose 3.8% in the past 12 months . In terms of individual items, the prices of used cars, which had risen by a record 10% in April, rose by a further 7.3% in May, accounting for a third of the total jump in prices last month.
But May’s price hikes were widespread in a variety of categories, including home appliances, clothing, and airfares. Food prices rose 0.4. Energy costs were unchanged, but they are still 28.5% higher than a year ago.
From grain maker General Mills to Chipotle Mexican Grill to paint maker Sherwin-Williams, a number of companies have raised prices or plan to do so, in some cases, to offset higher wages they are now keeping or attracting workers.
The inflationary pressures that have built up for months are not only putting pressure on consumers, but are also jeopardizing the economic recovery from the pandemic recession. One risk is that the US Federal Reserve will eventually react to rising inflation with overly aggressive interest rate hikes and wipe out the economic recovery.
The Fed, led by Chairman Jerome Powell, has repeatedly expressed its belief that inflation will prove temporary as supply bottlenecks are removed and parts and goods return to normal. However, some economists have expressed concern that as the economic recovery accelerates, which has been freed up by increasing consumer demand, so will inflation.
The question is how long?
“The price spikes could be bigger and longer because the pandemic has disrupted supply chains so badly,” said Mark Zandi, chief economist at Moody’s Analytics, before Thursday’s inflation report.
But “by autumn or by the end of the year,” suggested Zandi, “prices will come back to earth.”
Steak prices are getting hot
That wouldn’t be too early for consumers like Carmela Romanello Schaden, a real estate agent in Rockville Center, New York. Damage said she had to pay more for a number of items at her hair salon. But she feels most of the pain in the eating hallway. Her monthly food bill now stands at $ 200-250 for herself and her 25-year-old son – up from $ 175 at the beginning of the year.
A pack of strips of steak, which Damage normally bought for $ 28 to $ 32, rose to $ 45. She noticed the increase just before Memorial Day but bought it anyway because it was for a family picnic. But at that price she won’t buy it again, she said, and switched to pork and chicken.
“I’ve always been picky,” said Schaden. “If something goes up, I switch to something else.”
So far, Fed officials have not strayed from their view that higher inflation is a temporary consequence of the rapid reopening of the economy with accelerating consumer demand and the lack of sufficient supply and labor to keep up. Eventually, they say, supply will increase to meet demand.
Officials also note that year-on-year inflation indicators now appear particularly large because they are measured against the first few months of the pandemic, when inflation slumped when the economy nearly stalled. In the coming months, the inflation figures are likely to be lower year-on-year.
But after the government reported last month that consumer prices had risen 4.2% in the 12 months to April, Fed vice chairman Richard Clarida admitted; “I was surprised. This number was way above what I and external forecasters had expected.”
And monthly inflation rates, which are not distorted by the pandemic, have also risen since the beginning of the year.
Some economists fear that if prices rise too much and stay high for too long, expectations of further price increases will prevail. This, in turn, could intensify calls for higher wages and potentially trigger a wage-price spiral that plagued the economy in the 1970s.
“The market is starting to worry that the Fed will ease inflation, and that could blow the inflation genius out of the bottle,” said Sung Won Sohn, professor of economics and finance at Loyola Marymount University in Los Angeles.
Rising raw material costs are forcing Americans to pay more for products from meat to gasoline. The prices of corn, grain and soybeans are at their highest level since 2012. The price of lumber for building houses is at an all-time high. More expensive raw materials like polyethylene and wood pulp have resulted in higher consumer prices for toilet paper, diapers and most products sold in plastic containers.
General Mills has announced that it will raise the prices of its products as grains, sugar and other ingredients have become more expensive. Hormel Foods has already increased prices on Skippy peanut butter. Coca-Cola has announced that it will raise prices to offset higher costs.
Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will raise prices on about 60% of its products. Proctor & Gamble has announced that it will raise prices for its baby, women’s and adult care products.
This week Chipotle Mexican Grill announced it would raise menu prices by about 4% to cover the cost of raising workers’ wages. In May Chipotle announced that it would raise the hourly wages for its restaurant workers to an average of $ 15 an hour by the end of June.
“There is increased demand for hotel rooms, air travel and dining out,” said Gus Faucher, chief economist at PNC Financial. “Many companies are also facing upward pressure on their costs such as higher wages.”
Gregory Daco, senior US economist at Oxford Economics, noted that in some cases, increases in the price of goods such as cars increase car rental prices.
“It’s going to be a sultry summer on the inflation front,” said Daco. “There will be a transition from higher prices of goods to higher prices for services.”
AP Business Writer Anne D’Innocenzio contributed to this report from New York.