Sat | Sep 18, 2021

US consumer prices surge in June by the most since 2008

Published:Wednesday | July 14, 2021 | 12:08 AM
A sign displays the price for shirts as a shopper peruses the offerings at a Costco warehouse on June 17, in Lone Tree, Colorado.
A sign displays the price for shirts as a shopper peruses the offerings at a Costco warehouse on June 17, in Lone Tree, Colorado.

Prices for consumers in the United States 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 US Labor Department showed that consumer prices in June rose 0.9 per cent from May and 5.4 per cent 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 per cent in the past year, the largest increase since November 1991.

The pick up 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.”

Still, continued higher inflation does raise the prospect that the Fed could decide to act earlier than expected to pull back on its ultra-low 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 per cent 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 per cent in June, and gas costs, which rose 2.5 per cent last month and 45 per cent 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 eruption 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 3.0 per cent annual pace over the past two years. That is up from a 2.6 per cent annual inflation pace from May 2019 to May 2021.

In addition, some ongoing price spikes could fade soon. Hotel room prices surged 7.0 per cent in June alone and 15.1 per cent 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 per cent last month, have skyrocketed nearly 25 per cent compared with a year ago. Yet airline ticket prices are still below pre-COVID levels.

Prices for used cars are far above where they were before the pandemic and soared 10.5 per cent 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. But the surge isn’t likely to last. Prices are starting to drop at wholesale auctions where dealers buy vehicles, and used vehicle demand may be slowing.

More broadly, other trends are keeping consumer prices high, including restaurant service and household furniture.

So far, investors have largely accepted the Fed’s belief that higher inflation will be short-lived, with bond yields signalling that inflation concerns on Wall Street are fading. Bond investors now expect inflation to average 2.4 per cent over the next five years, down from 2.7 per cent in mid-May.