Consumer Prices Likely Rose Strongly Again in May as Economy Rebounded

US consumer prices are likely to have risen further in May as the economy picked up, driven by a surge in demand and a shortage of manpower and materials.

Economists polled by the Wall Street Journal estimate that the Department of Labor will report that the consumer price index was up 4.7% year over year in May. increased by 4.2% for the year End of April. That would be the highest 12-month inflation rate since 2008. The core price index, which excludes the often volatile categories of food and energy, is likely to have risen by 3.5% in May compared to the previous year, they estimated.

They also forecast that the index was up 0.5% seasonally adjusted in May compared to April. The index measures what consumers pay for goods and services, including clothing, groceries, restaurant meals, recreational activities, and vehicles.

Annual inflation measurements are backed up by comparisons with numbers from last year during the Covid-19 lockdown, when prices plummeted due to collapsing demand for many goods and services. This so-called base effect inflation data is expected to be driven significantly higher in May and June and to decline into autumn.

Compared to two years ago, prices rose by a total of 2.2% more subdued in April. However, overall prices rose at an annualized rate of 7.2% for the three months ended April.

Consumers are seeing many prices rise for a variety of reasons as the US economic recovery gains momentum.

New car prices have skyrocketed due to a lack of computer chips that has limited auto production. That, in turn, drove up used car prices. Car rental prices have skyrocketed because businesses sold their fleets when demand collapsed along with travel during the pandemic. Airfares and hotel room prices rebound as consumers return to travel.

More and more companies have started to pass the higher costs on to consumers raw material and wages.

Food manufacturers said their costs are rising alarmingly, causing them to raise some prices. “The inflationary pressures that we are seeing are significant”

General mills Inc.

That’s what Chief Executive Jeff Harmening said at a recent investor conference. “It’s probably higher than we’ve seen in the past decade.”

Rising costs for everyday foods like bacon and fruit have raised concerns about inflation. Here’s why you might be paying more for breakfast, and what that says about future price trends. Photo: Carter McCall / WSJ

He and his colleagues point out that transport, goods and labor costs are rising at the same time. They expect the trend to continue at least for the rest of this year. As a result, General Mills,

Campbell soup Co.

,

Unilever

PLC,

JM Smucker Co.

and other large food companies are raising prices. Some increases are already visible on supermarket shelves, with more to follow this summer.

The price surge reflects robust consumer demand, fueled by widespread Covid-19 vaccinations, eased business restrictions, trillions of dollars in federal pandemic relief programs, and ample household savings. The US gross domestic product rose in the first quarter by a seasonally adjusted 6.4%. Economists polled by the Journal in April forecast that the economy will grow at an annual rate of 8.1% in the second quarter it’s ready for its best year since the early 1980s.

Policy makers are watching the May reading to gauge the extent of what many expect after a year of very weak price pressures during the worst part of the pandemic as several months of higher inflation. Whether the spike in inflation proves temporary is a key question for the US economy and financial markets as the Biden administration, Congress and the Federal Reserve continue to support the economy with fiscal and monetary policies.

The Fed expects the inflation rate to rise temporarily this year. A sustained sharp rise in inflation could force the central bank to tighten its monetary policy earlier than planned or to react more aggressively later in order to meet its average inflation target of 2%.

The central bank’s inflation target is based on the Department of Commerce’s consumer spending index, which tends to be slightly below the CPI. The Fed has announced that it will keep rates near zero until PCE inflation averages 2% and full employment is reached.

Kathy Bostjancic, chief economist of US finance at Oxford Economics, said the Fed intends to exceed the inflation rate moderately as it could be good for the economy. Higher inflation would mean higher interest rates, which would give the Fed more leeway to cut rates in the next economic downturn, she said.

Jeffrey Stark, 28, of Arlington, Virginia, wants to travel more now that stores reopen, but finds high prices and shortages of goods and services limit his ambitions. Flying to a family event in Utah, he originally planned to allow a few extra days to explore on his own – only to abandon those plans when he couldn’t find a car to rent.

“My travel this year seems to be largely limited to visiting people, not places, as I see reports of hotel reservations and most importantly no available rental cars,” said Mr. Stark, a geographic information systems analyst for the Postal Service.

Increased demand has prompted employers to hire more workers, but many companies are raising wages while struggling to hire people. Job offers reached 9.3 million in April, the highest number since records began in 2000 as the gap widened between job vacancies and those who assumed those roles.

Chipotle Mexican Grill Inc.

recently raised menu prices by around 4% in many markets to cover the cost of wage increases and higher raw material prices, CFO Jack Hartung said at an investor conference earlier this week.

According to a survey by the National Federation of Independent Business, a trade association, 48% of small businesses said they had increased average sales prices in May, the highest percentage since 1981.

The unique dynamic of reopening a consumer spending-fuel economy is at play, Ms Bostjancic said. Consumers are ready to spend more than they normally would thanks to a year of being locked up at home and the extra savings many households have amassed.

“This kind of price hike won’t happen next year because consumers will shy away from it. We could even see prices return to lower levels, ”she said, referring to the sharp rise in car rental prices. “There is only a limited amount of time to say, ‘Okay, I’ll pay a little more. I’ve got government support and I’ve built up savings. I haven’t been outside in a while. Whatever it takes, I’ll pay for it. ‘”

Write to Gwynn Guilford at gwynn.guilford@wsj.com

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