US inflation resumes rapid rise by accelerating in May

US consumer price growth resumed its rapid rise in May, accelerating 1 per cent during the month as rising inflation in the services sector 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 faster than the 0.3 per cent increase recorded in April and above economists’ expectations for a 0.7 per cent increase.

At that pace, the year-over-year increase rose to 8.6 per cent, the highest level since December 1981. Economists have previously said headline annual inflation should start to retreat as it starts lapping very elevated levels logged last year, but the recent run-up in prices has so far defied that trend.

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. However, the annual rate moderated slightly to 6 per cent, compared to the 6.2 per cent pace in April.

Services inflation, once energy-related expenses were stripped out, rose 0.6 per cent for the month, and are up 5.2 per cent on the year.

The peak in inflation has been delayed primarily by a further climb in energy prices, with national petrol prices approaching $5 a gallon as a result of the prolonged conflict between Russia and Ukraine, 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.

The Biden administration has sought to pin the blame on Russian president Vladimir Putin, linking the run-up in commodity prices to the war. A senior White House official on Thursday said supply chain disruptions stemming from China’s Covid-19 lockdowns also maintained upward pressure on inflation in May.

Short-dated US government bonds, which are more sensitive to changes in monetary policy, sold off sharply after the report’s release, with the two-year Treasury yield up 0.09 percentage points to 2.9 per cent as investors anticipated the US central bank will need to ramp up its efforts to bring down inflation.

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 top officials to lift interest rates even more forcefully than financial markets expect. Policymakers have already signalled that at a minimum, the Fed will deliver a string of half-point rate rises, having delivered the first adjustment of that size since 2000 in May.

The Fed is all but guaranteed to implement another increase of half a percentage point at its policy meeting next week, and traders have priced in the federal funds rate rising to roughly 2.9 per cent by the end of the year from its current target range of 0.75 per cent to 1 per cent.

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

Elevated inflation has become the biggest economic challenge for the Biden administration, 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.

Treasury secretary Janet Yellen recently admitted she was “wrong” about the extent to which inflation would become a persistent problem. A new biography also alleged she had initially wanted to scale back President Joe Biden’s landmark $1.9tn stimulus package that passed last year.

In congressional testimonies this week, Yellen defended the actions undertaken by the White House at a time of extreme economic uncertainty, but acknowledged that inflation is running at an “unacceptable” level. Fighting inflation is the administration’s top priority, she said, calling on Congress to also do more to aid in those efforts.

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