The reopening of the US economy is fueling inflation and the rebound in the labor market
© Reuters. FILE PHOTO: Britni Mann speaks to a potential employer during a job fair at Hembree Park in Roswell, Georgia, the United States, May 13, 2021. REUTERS / Chris Aluka Berry
By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer prices rose solidly in May, leading to the largest annual surge in nearly 13 years as the reopening of the economy fueled demand for travel-related services while a global semiconductor shortage spiked used vehicle prices drove.
The waning impact of the pandemic on the economy was also underscored on Thursday by other data, which showed the number of Americans filing new unemployment benefits fell to its lowest level in nearly 15 months last week.
Vaccinations for COVID-19, trillions of dollars from the government, and record-low interest rates are fueling demand and leaving companies vying for raw materials and workers. About a third of the rise in consumer inflation last month was in very expensive used cars and trucks, driven by a global semiconductor shortage that is below auto production.
May’s inflation drivers appear temporary, in line with Federal Reserve Chairman Jerome Powell’s repeated assertion that higher inflation will be temporary.
“Sections of the economy that contributed the most to inflation in April and May are undergoing understandable short-term adjustments or are merely recovering to ‘normal’ levels,” said Chris Low, chief economist at FHN Financial in New York. “Areas not affected by the pandemic moderate the rise in the CPI. But this report confirms that demand exceeds supply. “
The consumer price index rose 0.6% last month after rising 0.8% in April, the largest increase since June 2009. Food prices rose 0.4%, but gasoline fell for the second straight month. In the 12 months to May, the CPI accelerated 5.0%. This was the strongest year-over-year increase since August 2008, following a 4.2% increase in April.
The jump partly reflected the decline in last spring’s weak values from the calculation. May was likely the peak of the CPI, with these so-called base effects likely to flatten out in June. Economists polled by Reuters had forecast CPI to rise 0.4% in May and 4.7% year-on-year.
Excluding the volatile food and energy components, the CPI rose 0.7% after rising 0.9% in April. The so-called core CPI was increased by 7.3% due to an increase in used car and truck prices. New car prices also rose sharply.
With at least half of the US adult population fully vaccinated against COVID-19, Americans travel.
Rental car prices rose 12.1% in May. The cost of plane tickets and hotel accommodation also rose.
Consumers paid more for car insurance, furniture and bedding, rents, and clothing. They did, however, get some relief on healthcare costs, which fell 0.1% as prescription drug prices fell 0.3%.
Core CPI soared 3.8% in the 12 months to May, the steepest rise since June 1992. The Fed has signaled that it could tolerate higher inflation for longer to offset years of inflation was below their target of 2%, a flexible average.
The Fed’s preferred inflation index, the consumer spending index excluding the volatile components of food and energy, rose 3.1% in April, the largest increase since July 1992, pumping money into the economy through monthly bond purchases.
“Numbers like today’s CPI will certainly raise eyebrows at the Fed, but the bottom line is likely to require additional evidence to determine whether inflationary pressures will persist,” said Charlie Ripley, senior investment strategist for Allianz Investment Management .
Investors shook off strong inflation and increased Wall Street stocks. The dollar remained stable against a basket of currencies. US Treasury bond prices were mixed.
Inflation could kick in from the labor market, where layoffs are easing. Employers are raising wages as they compete for scarce labor, with millions of unemployed Americans staying at home due to childcare issues, generous unemployment benefits, and ongoing fears of the virus, despite vaccines now widely available.
In another report on Thursday, the Labor Department said initial government unemployment benefit claims for the week ending June 5 fell by 9,000 to a seasonally adjusted 376,000. That was the lowest since mid-March 2020, when the first wave of COVID-19 infections hit the country, causing non-essential businesses to shut down.
The claims have now decreased for six weeks in a row. The decline in applications was led by California and Pennsylvania.
Although layoffs are subsiding, entitlements remain well above the 200,000 to 250,000 range that is considered compatible with a healthy labor market. However, they have fallen from a record high of 6.149 million in early April 2020.
Another drop in claims is likely as Republican governors in at least 25 states, including Florida and Texas, cease federal-funded resident unemployment programs starting Saturday.
These states make up about 40% of the economy. Benefits that end early include a $ 300 weekly unemployment allowance, which the company says is preventing unemployed people from looking for work.
The number of people who continue to receive benefits after a first week of assistance fell by 258,000 to 3.5 million in the week ended May 29. These so-called ongoing claims had been bogged down between 3.6 million and 3.8 million since mid-March, suggesting that workers were re-entering the workforce.
At least 15.3 million people had received unemployment benefits for the week ending May 22 under all programs. Although employment was still 7.6 million jobs below its February 2020 peak, labor shortages boosted wage growth in May. There is a record of 9.3 million unfilled jobs in the economy.