Massive Jump in Inflation Does Little to Spook Investors, Fiscal Doves

A decades-high jump in inflation has the worrywarts worrying more, while those who support the Federal Reserve’s low interest rates and bond-buying program continue to believe it is only temporary.

(AP Photo/Patrick Semansky, File)

WASHINGTON (CN) — High inflation has financial experts staking out sides, though neither extreme expects the Federal Reserve will upend the apple cart with a humming economy on the line.

The Consumer Price Index, released Thursday morning by the Bureau of Labor Statistics, showed headline inflation increased 0.6% last month, down somewhat from the 0.8% increase seen in April. Core inflation, which excludes food and energy prices, gained 0.7% compared with April’s 0.9% increase.

Over the last year, however, inflation has gained 5% — the largest 12-month increase since August 2008, when inflation gained 5.4%. In the same span, meanwhile, core inflation has risen 3.8%, the highest increase since 1992.

The data has made converts of some previously unconcerned economists, but many experts remain on the side of the Fed in believing inflation will hover around 2% and not spiral out of control.

“We believe this will be the peak in the annual rate of inflation as the strong base effects subside in the coming months,” wrote Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

Among monetary hawks, however, the spike in inflation provides ammunition for their demand that the Federal Reserve get out of bond purchases and start to consider raising rates.

“Bottom line, I believe we can now throw out the base effect/easy comps argument as prices are now rising solidly to where they were in 2019,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group in an investor’s note.

He added that “the whole transitory or not debate is only on the goods side as services inflation is ALWAYS sticky (outside of pandemics) and persistent, and we are in the midst of the most widespread scenario of goods price pressures since the 1970s.”

Unlike data from April, when inflation saw peaks among a few key sectors, last month’s number showed an increase almost across the board. According to the latest data, the increase in used cars and trucks again outpaced other items, gaining 7.3% in May compared with the 10% increase in April. Apparel also quadrupled its gains in May, nabbing a 1.2% increase compared with just a 0.3% increase in April.

The services sector saw fewer gains, with shelter increasing 0.3% in May compared with a 0.4% increase in April, and a drop from a 2.9% increase in April for transportation services to a 1.5% increase last month. Medical care services, which had flatlined in April, saw prices fall 0.1% last month.

Energy prices, which are cut from core inflation because of significant fluctuations, both rose and fell in May. Gasoline prices fell 0.7% in May after a 1.4% decrease in April, while fuel oil gained 2.1% in May compared with a 3.2% decrease the prior month.

The gain in prices across multiple sectors has some worried. “A rise in inflation was always likely to happen this year as economies re-opened and energy prices recovered from last year’s sharp falls,” wrote Vicky Redwood, a senior economic adviser at Capital Economics. “But in the U.S. in particular, the increase since the start of the year has exceeded even our relatively strong expectations.”

She noted that in Europe, the “relatively slow pace of economic recovery” should tamp down inflation and help it drop next year.

“In the U.S., the story is different,” Redwood wrote. “Headline inflation this quarter now looks likely to hit 4.6%, over double the rates in the euro-zone and [United Kingdom].”

Price pressures could soon ease, but many economists now believe core inflation will remain above the Fed’s 2% target. Some, like economic consultant Joel Naroff, believe inflation will remain above that threshold possibly all of next year. “The rate was almost always below the target for over a decade,” he wrote, “so it will take quite a long period of high inflation to bring a medium-term average up to 2%.”

The Federal Reserve meets next week, and it is possible the central bank changes its approach toward bond purchases to taper out of that market. However, some believe the Fed will remain steadfast over the summer and — to borrow the parlance of the Fed’s Chair Jerome Powell — that the central bank won’t even “think about think about” tapering bond purchases or raising interest rates until late 2021 at the very earliest.

Some experts have warned about rising inflation since late last year, but in May the BLS’ core inflation report hammered home the reality that inflation is becoming a major weight on the economy. The spike in inflation has had a middling effect on markets, however, with some investors quickly putting those concerns behind them and betting on the Fed’s continued support.

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