Consumer Prices Surge in May
Fed Likely Won’t Intervene
The Consumer Price Index, which tracks costs across a range of goods including food, energy, groceries, and housing, rose 5% in May on an annual basis—its fastest pace since August 2008. Economists had expected the CPI to rise 4.7% in May. In August 2008, the CPI increased 5.3% shortly before the US entered the financial crisis.
Despite the CPI increase, industry watchers do not think it will prompt intervention from the Federal Reserve when policymakers meet next week. To date, the Fed has not reacted to the rise in inflation because it believes this to be “transitory” or temporary. What’s more, the numbers look higher due to year-over-year comparisons from 2020, when pandemic restrictions were weighing on prices.
Consumers Take Price Increases in Stride
Increases in prices for everything from automobiles to computers are being fueled by supply-chain issues which have resulted in shortages of key components. At the same time, there has been fairly limited pushback from consumers who are ready to spend again after more than a year of pandemic restrictions. Overall, there is demand to spend as the economy reopens—especially when it comes to travel and leisure.
That has also been the case in the automobile market. Consumers are still buying new vehicles even though prices are up 3.3% year-over-year, which marks the largest increase since November 2011. Used car prices surged 29.7% year-over-year, while airfare is up 24%.
The increased prices have not stopped consumers from booking flights and buying cars. At least for now, it appears the economy is not a price-sensitive one.
Fed Thinks Inflation Is Temporary
Many consumers are taking the price increases in stride, but with every passing CPI report there is an increasing focus on the rising cost of food and other essential items like gas. With that said, the White House and the Central Bank are confident the inflationary pressures will soon ease. They are not bracing for a repeat of the 1970s when inflation spiraled out of control. Once supply-chain bottlenecks are ironed out and supply catches up with demand, policymakers believe inflation will come down.
There are some signs emerging that it is already happening. The CPI increase from April to May was smaller than March to April. Both investors and consumers will likely be paying more attention to this metric in the coming months as it impacts everything from snacks to stocks.
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