U.S. consumer inflation reached its highest level in more than four decades in May as surging energy and food costs pushed prices higher, with little indication of when the upward trend could ease.
The Labor Department on Friday said that the consumer-price index increased 8.6% in May from the same month a year ago, marking its fastest pace since December 1981. That was also up from April’s CPI reading, which was slightly below the previous 40-year high reached in March. The CPI measures what consumers pay for goods and services.
May’s increase was driven in part by sharp rises in the prices for energy, which rose 34.6% from a year earlier, and groceries, which jumped 11.9% on the year, the biggest increase since 1979. But inflation pressures were distinctly broad-based in May, said
Sarah House,
senior economist at Wells Fargo Securities.
“Given everything from the implications of the Russian invasion of Ukraine, the Chinese lockdowns and just the sheer appetite for travel…what we’ve seen is the perfect storm of those factors hitting, along with some major refinery closures,” she said. “Inflationary pressures were seen nearly everywhere.”
U.S. stocks fell sharply and the yield on the benchmark 10-year U.S. Treasury note rose after the release of the inflation figures.
Prices for used cars and trucks—a key engine of the past year’s inflation surge—rose 1.8% in May from April, reversing three months of declines. Shelter costs, an indicator of broad inflation pressures, accelerated on a monthly basis in May and were up 5.5% compared with a year ago.
Airline fares rose 12.6% on the month, the third straight double-digit rise.
“We suspect that the formidable momentum in inflation could push the headline rate for CPI close to 9% as early as next month,” said Ms. House, adding that it is likely to stay near those levels through the autumn.
The May inflation figures came as consumer sentiment soured further on the economy. The preliminary estimate of the consumer sentiment index published Friday by the University of Michigan fell to 50.2 in June from 58.4 in May, marking its lowest reading on record. Nearly half of those surveyed attributed their negative views to inflation, up from 38% the prior month.
High inflation is a downside of strong U.S. growth, fueled in part by low interest rates and government stimulus to counter the Covid-19 pandemic’s impact. The annual rate of inflation has risen sharply since early 2021, when the U.S. economy’s rebound from the pandemic accelerated, leading to supply disruptions and other imbalances that put upward pressure on prices for longer than policy makers anticipated.
The Federal Reserve faces the difficult task of tightening monetary policy enough to cool the economy and calm inflation, while avoiding a recession. Fed officials on May 4 lifted rates by a half-percentage point and will meet again next week to consider a similar increase.
How Prices Climbed in May
Here’s a look at how much more consumers are paying for goods and services than they were a year ago.
Economists and policy makers had been watching closely for signs that inflationary pressures are ebbing. But May’s resurgence in price increases ratchets up pressure on the Fed to raise rates aggressively to tame inflation, said
James Knightley,
chief international economist at ING.
“The breadth of inflation pressures in the economy should alarm the Fed,” he said.
On a monthly basis, the CPI jumped a seasonally adjusted 1% in May after rising 0.3% in the prior month. The so-called core-price index, which excludes the often volatile categories of food and energy, increased 0.6% on the month, the same as in April. That compares with an average monthly gain of 0.2% for both measures in the two years before the pandemic.
On a 12-month basis, the core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.
Inflation was highest in the South, at 9.2%, and the Midwest, where prices rose 8.8%. Residents of the Tampa-St. Petersburg-Clearwater area of Florida swallowed an 11.3% increase over the 12 months ended in May, driven in part by a sharp rise in rental prices. Inflation was just 6.3% in the New York City metropolitan area, due in part to relatively low rental-price gains.
Energy prices rose in May as Russia’s invasion of Ukraine continued to push up prices for crude-oil and natural gas. Gasoline prices have breached record levels in recent weeks, with the average gallon of regular unleaded currently going for $4.97, according to AAA. The strength in energy price rises will keep putting upward pressure on inflation, said Ms. House, the Wells Fargo economist.
Consumers’ grocery bills have risen by an annual rate of more than 10% since earlier this year, a pace last seen in the early 1980s. Food prices are unusually broad, and every single grocery category measured in the report rose in May from a year ago—most of them by double-digits. There are numerous causes, unlike early in the pandemic when meat prices drove much of the increase, said
Paul Ashworth,
chief North America economist at Capital Economics.
“It’s not just the weather—it’s diseases affecting citrus trees and chickens. It’s the Ukraine conflict,” which has affected prices for baked goods and cereals, he said. Drought, too, is hitting prices for vegetables and other crops.
“For people on lower incomes this is not discretionary spending,” Mr. Ashworth said. “Other than substituting out cheaper food types—cheaper meat cuts, whatever it might be—people need to continue buying food.”
Price pressures are strong across much of the economy in part because of an unusually tight U.S. labor market, with demand for workers outstripping supply. Employers added 390,000 jobs last month, and the unemployment rate hovered near a half-century low. Still, even after the economy gained more than 6.5 million jobs in the space of a year, fewer Americans are employed as a share of the population than before the pandemic.
Those dynamics are driving wage growth, adding to inflationary pressures. Strong gains in wages and hiring are pumping more money into Americans’ bank accounts, propping up demand as inflation erodes spending power for many. Meanwhile, higher labor costs stemming from worker shortages are prompting many employers to raise prices.
Demand for travel and other services has surged as the impact of Covid-19 recedes and people spend more freely on experiences they missed out on during the worst of the pandemic. This is pushing up prices for these services. Airline fares surged 37.8% from a year ago, while hotel prices were 19.3% higher. Restaurant prices rose 7.4%, the sharpest rise since 1981.
Despite strong demand for summer activities such as travel, higher prices are eating into many business owners’ profitability. In early 2020, Suzanne Hoffman, an author who runs wine tours in Italy, canceled group tours to Piedmont because of the pandemic. A number of guests rolled over their deposits and are finally taking their trips this summer.
“The demand is there; people are just chomping at the bit,” said Ms. Hoffman, who is based in Edwards, Colo.
But the people taking those long-delayed trips are paying 2019 prices, she said, while fuel, dining and other costs to conduct the tours have gone up. That is hurting Ms. Hoffman’s bottom line to the extent that she might stop running future tours given the uncertain outlook.
“I canceled my October tour. I just don’t want to make any commitments beyond this summer,” she said.
Some main drivers of inflation could be easing.
The backlog in cargo ships waiting to unload in Los Angeles and Long Beach, Calif., fell for the fourth straight month in May, said
Oren Klachkin
of Oxford Economics.
Target Corp.
recently said the need to unload unwanted goods would cause its profit to drop. Clothes retailers have also been caught with swelling inventories of casual clothes and home items as shoppers scaled back spending on goods that had been popular throughout the pandemic.
But supply bottlenecks are easing too slowly and too sporadically to ease inflationary pressures, economists say. Energy disruptions caused by the Ukraine war and the lack of workers to fill vacancies in the U.S. are exacerbating strains on the economy’s ability to meet demand without price rises.
The breadth and persistence of these supply problems means that for inflation to ease, demand must come down, said Mr. Knightley of ING. “To get demand into better balance with the supply the onus is on the Federal Reserve to do the heavy lifting,” he said.
—Harriet Torry contributed to this article.
Write to Gwynn Guilford at gwynn.guilford@wsj.com
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