WASHINGTON -- Prices for U.S. consumers jumped in June by the most in 13 years, evidence that a swift rebound in spending has run up against widespread supply shortages that have escalated the costs of many goods and services.
Tuesday's report from the Labor Department showed that consumer prices in June rose 0.9% from May and 5.4% over the past year -- the sharpest 12-month inflation spike since August 2008. Excluding volatile oil and gas prices, so-called core inflation rose 4.5% in the past year, the largest increase since November 1991.
The pickup in inflation, which has coincided with the economy's rapid recovery from the pandemic recession, will likely intensify a debate at the Federal Reserve and between the Biden administration and congressional Republicans about how persistent the accelerating price increases will prove to be.
The Fed and the White House have made clear their belief that the current bout of inflation will prove temporary. As supply chain bottlenecks are resolved and the economy returns to normal, they suggest, the price spikes for such items as used cars, hotel rooms and clothing will fade. Some economists, along with Wall Street investors, have indicated that they agree.
"The headline inflation numbers have been eye-popping in recent months, but underlying inflation remains under control," said Gus Faucher, an economist at PNC Financial Services. "Once again a few categories -- used vehicles, airfares, rental cars, hotels -- are experiencing huge price gains because of the recovery from the pandemic."
Other prominent economists like Lawrence Summers, however, argue that the higher prices are an urgent concern. They warn that the Fed's low interest rates and other supports for the markets are excessively juicing the economy. Their worry is that the central bank will be behind the curve once it decides to tame inflation and raise rates.
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Continued higher inflation does raise the prospect that the Fed could decide to act earlier than expected to pull back on its ultralow interest rate policies, which have been intended to support more borrowing and spending. If so, that would risk weakening the economy and potentially derailing the recovery.
For now, price increases are running ahead of the wage gains that have kicked in this year, which means the financial burdens on millions of households have grown more difficult. Average hourly earnings increased 3.6% in June compared with a year earlier, normally a solid gain, but far less than current inflation.
Lower-income workers are also hardest hit by rising food prices, which rose 0.8% in June, and gasoline costs, which rose 2.5% last month and 45% from a year ago.
One reason why year-over-year inflation readings are now so high is that the most recent prices are being measured against the sharp price declines that followed the start of the pandemic in March of last year. That statistical distortion began to fade in June and will no longer be a factor when July's year-over-year inflation figures are released next month.
Looking past those distortions, prices are rising faster than they did before the pandemic but not as much as the recent monthly numbers suggest. Greg McBride, chief financial analyst at Bankrate, noted that compared with June 2019, inflation has risen at about a 3% annual pace over the past two years. That is up from a 2.6% annual inflation pace from May 2019 to May 2021.
As vaccinations become more widespread and consumers unleash their pent-up savings, demand is rebounding much faster than supply can catch up. Many Americans are newly eager to book airline tickets, rental cars and hotel rooms, while the travel industry is still climbing back from the depths of the pandemic. Backlogged supply chains are also clashing with demand for products like furniture, bicycles and auto parts.
Hotel room prices surged 7% in June alone and 15.1% in the past year, the most on records dating to the 1950s. But that surge has merely returned hotel prices to pre-pandemic levels and so may not persist.
Airline fares, which jumped 2.7% last month, have skyrocketed nearly 25% compared with a year ago. Yet airline ticket prices are still below pre-covid levels.
USED-CAR PRICES SOAR
Prices for used cars are far above where they were before the pandemic and soared 10.5% last month alone -- the largest such monthly increase on record. That spike accounted for about one-third of the monthly increase in consumer prices for a third straight month. Prices are up 45.2% compared with last June.
Used cars have become vastly more expensive largely because semiconductor shortages have cut production of new cars, thereby leading more buyers to the used car lots. And many rental car companies sold portions of their fleets during the pandemic to raise cash and are now desperately buying up used cars to replenish their supply.
The shortage of rental cars combined with greater demand has elevated vehicle rental prices by 90% in the past year.
The surge in used car prices, though, isn't likely to last. Prices are starting to drop at wholesale auctions where dealers buy vehicles, and used vehicle demand may be slowing.
David Kelleher, who runs a Stellantis (formerly Fiat Chrysler) dealership in Glen Mills, Pa., near Philadelphia, has observed that fewer of his customers are seeking used vehicles.
"I think the word got out that it was a tough time to buy a used car," Kelleher said.
Kelleher, who has now cut prices on the roughly 150 used vehicles he has in stock, says other dealers are reporting the same conditions, and he expects customers to return once the price declines take full effect. Still, supplies of new vehicles remain tight and prices high, a trend that could sustain customer demand for used vehicles.
The cost of shelter also is picking up, with prices rising 0.5% in June compared with the previous month. All over the country, rent is starting to soar, adding strain to a housing market already marked by skyrocketing home prices. Housing has become a particularly unequal feature of the economic recovery, with economists paying special attention to rent increases that could be here to stay.
The measure for "food away from home" -- namely restaurant food -- rose 4.2% over the past year, the largest 12-month increase in that index since May 2009.
SMALL-BUSINESS PRICES UP
Figures out Tuesday from the National Federation of Independent Business showed 47% of small-business owners, the largest share since 1981, reported higher selling prices in June.
Consumers are anticipating higher prices in the near-term. Median inflation expectations for the coming year increased to a series high 4.8% in June, according to the New York Fed's Survey of Consumer Expectations.
The spice maker McCormick & Co. said it plans to raise prices to offset higher raw materials costs. Likewise, Conagra has said inflationary pressures have reduced its profits.
The company, which makes everything from Duncan Hines products to Pam cooking spray, has said it will raise prices to offset some of those costs. PepsiCo, too, said it will likely raise prices for its drinks and Frito-Lay snacks after Labor Day.
So far, investors have largely accepted the Fed's belief that higher inflation will be short-lived, with bond yields signaling that inflation concerns on Wall Street are fading. Bond investors now expect inflation to average 2.4% over the next five years, down from 2.7% in mid-May.
Information for this article was contributed by Christopher Rugaber of The Associated Press; by Rachel Siegel of The Washington Post; and by Olivia Rockeman of Bloomberg News (TNS).
