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Consumer prices jump again in May

Surge in costs up 5% from past year by Compiled Democrat-Gazette Staff From Wire Reports | June 11, 2021 at 7:13 a.m.
Airline passengers wait to check in at George Bush Intercontinental Airport in Houston in this Sunday, May 16, 2021, file photo. As consumers increasingly venture away from home, demand has begun to shift away from manufactured goods and toward services, from airline fares to restaurant meals, triggering inflation in those areas. (AP/David J. Phillip)

WASHINGTON -- American consumers absorbed another surge in prices in May -- a 0.6% increase over April and 5% over the past year, the biggest 12-month inflation spike since 2008.

The May rise in consumer prices that the Labor Department reported Thursday reflected a range of goods and services now in growing demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly reopening economy.

The price jumps are sure to keep inflation at the center of political and economic debate in Washington.

Increased consumer appetite is bumping up against a shortage of components, from lumber and steel to chemicals and semiconductors, that supply such key products as autos and computer equipment, all of which has forced up prices. And as consumers increasingly venture away from home, demand has spread from manufactured goods to services -- airline fares, for example, along with restaurant meals and hotel prices -- raising inflation in those areas, too.

In its report Thursday, the government said that core inflation, which excludes volatile energy and food costs, rose 0.7% in May after an even bigger 0.9% increase in April, and has risen 3.8% over the past year. That is the sharpest 12-month jump in core inflation since 1992. And it is far above the Federal Reserve's 2% target for annual price increases.

Among specific items in May, prices for used vehicles, which had surged by a record 10% in April, shot up an additional 7.3% and accounted for one-third of May's overall price jump. The price of new cars, too, rose 1.6% -- the largest one-month increase since 2009.

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The jump in new and used vehicle prices reflects supply chain problems that have caused a shortage of semiconductors. The lack of computer chips has limited production of new cars, which, in turn, has reduced the supply of used cars. As demand for vehicles has risen, prices have followed.

But higher prices were evident in a wide variety of categories in May, including household furnishings, which rose 0.9%, driven by a record jump in the price of floor coverings. Airline fares rose 7% after having increased 10.2% in April. Food prices rose 0.4%, with beef prices jumping 2.3%. Energy costs, though unchanged in May, are still up 56.2% in the past year.

From the cereal maker General Mills to Chipotle Mexican Grill to the paint maker Sherwin-Williams, a range of companies have been raising prices or plan to do so, in some cases to make up for higher wages they're now paying to keep or attract workers.

Andrew Hunter, a senior U.S. economist at Capital Economics, noted that the price category that covers restaurant meals jumped 0.6% last month. He took that as evidence that labor shortages at restaurants, hotels and other service sector companies are beginning to fuel wage and price increases.

Government officials and many economists have said much of the price jump is likely to fade with time as the economy gets past a reopening bounce after a year of lockdown and supply catches up to demand. The annual number in particular is getting a boost from what's called a base effect: The year-ago figure was depressed by pandemic-driven shutdowns, so the current figures look large by comparison.

However, Republicans seized on the data to issue their latest warnings.

"Massive stimulus spending is a contributing factor," tweeted Sen. Mike Crapo, R-Idaho. "Proposals for further federal spending, coupled with job-killing tax hikes, are not the remedy for economic recovery."

But the strong monthly figure for May, which came on the heels of a sharp rise in April, showed that prices have been moving up quickly for more than just technical reasons. The critical question is whether those stronger-than-expected price pressures are a transient trend tied to reopening or something more persistent.

"We are at peak heat. This is the moment," said Julia Coronado, founder of the research firm MacroPolicy Perspectives. "We know we'll get a fade. The question is, how big is the fade?"

The inflation pressures are not only squeezing consumers but also posing a risk to the economy's recovery from the pandemic recession. One risk is that the Fed will eventually respond to intensifying inflation by raising interest rates too aggressively and derail the economic recovery.

'BACK TO EARTH'

The central bank, led by Chairman Jerome Powell, has repeatedly expressed its belief that inflation will prove temporary as supply bottlenecks are unclogged and parts and goods flow normally again.

"The price spikes could be bigger and more prolonged because the pandemic has been so disruptive to supply chains," said Mark Zandi, chief economist at Moody's Analytics. But "by the fall or end of the year," Zandi suggested, "prices will be coming back to earth."

The government's month-to-month readings of inflation, which aren't subject to distortions from the pandemic, have also been rising since the year began. Some economists say they fear that if prices accelerate too much and stay high too long, expectations of further price increases will take hold. That, in turn, could intensify demands for higher pay, potentially triggering the kind of wage-price spiral that bedeviled the economy in the 1970s.

Investors so far appear unfazed by the risks of higher inflation. On Thursday, yields in the bond market declined in the hours after the government reported the surge in consumer prices. And stock prices rose.

"Investors were encouraged that drivers of this month's inflation advance came from factors that indeed are likely to be transitory, such as used auto prices and airline travel," said Sam Stovall, chief investment strategist at the Center for Financial Research and Analysis.

INCREASES WIDESPREAD

For now, though, rising commodity costs are forcing Americans to pay more for items from meat to gasoline. Prices for corn, grain and soybeans are at their highest levels since 2012. The price of lumber to build homes is at an all-time high. More expensive commodities, such as polyethylene and wood pulp, have translated into higher consumer prices for toilet paper, diapers and most products sold in plastic containers.

General Mills has said it's considering raising prices on its products because grain, sugar and other ingredients have become costlier. Hormel Foods has already increased prices for Skippy peanut butter. Coca-Cola has said it expects to raise prices to offset higher costs.

Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will be raising prices on about 60% of its products. Proctor & Gamble has said it will raise prices for its baby, feminine and adult care products.

"There is stronger demand for hotel rooms, air travel, restaurant dining," said Gus Faucher, chief economist at PNC Financial. "Many businesses are also facing upward pressure on their costs such as higher wages."

Information for this article was contributed by Martin Crutsinger, Anne D'Innocenzio, Stan Choe, Christopher Rugaber and Alex Veiga of The Associated Press; by Jeanna Smialek of The New York Times; and by Rachel Siegel and Andrew Van Dam of The Washington Post.

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