Consumer prices rose at an annual rate of 8.6% in May, the Bureau of Labor Statistics announced Friday, as inflation hit the fastest pace in 40 years. On a monthly basis, prices rose by 1%, more than triple the 0.3% month-over-month rate recorded in April.
Price increases were broad-based, with energy, food and housing leading the way. Energy costs rose 3.9% in May — and 34.6% over the last 12 months — as gasoline hit record prices in the U.S. The cost of groceries jumped 11.9% on an annual basis, the biggest increase since 1979. And the cost of shelter picked up speed in May as well, rising at an annual rate of 5.5%, the biggest jump in over 30 years.
Core inflation — a measure that leaves out volatile food and fuel prices and is closely watched by the Federal Reserve — increased at a 6.0% annual rate, higher than in April and slightly above expectations.
No silver lining: The May inflation report dashes hopes that inflation has peaked, and increases the odds that the Fed will have to move even more aggressively to get inflation under control, perhaps for months to come and at the risk of causing a recession.
“I keep looking at the line item breakdown of the CPI report searching for silver linings and I just don't see any,” said Neil Irwin of The New York Times. “This report is a disaster if you're a Fed or Biden administration official hoping this inflation will go away without a serious downturn.”
The breadth of the price hikes is particularly concerning. “Inflation is hitting not only the volatile food and energy categories, which themselves look to persist at high levels, especially food, but has moved deeply into services and shelter costs, while remaining high in goods categories we thought were cooling off,” Robert Frick of Navy Federal Credit Union said in a note.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, tried to find some ray of hope. “Airline fares will stop rising [very] soon, given 45% drop in jet fuel prices from peak, and US vehicle output back to pre-Covid levels will ease pressure on vehicle prices.” And economist David Rosenberg argued that the inflation numbers look much better if “you strip out of the CPI all the items that are linked to energy (air fares, moving/freight, rental cars, delivery services, new and used vehicles),” which produces an adjusted inflation rate closer to 4%. But as others noted, the economy people actually live in is heavily dependent on oil, the cost of which shows no signs of easing as the war in Ukraine rages, China reopens its economy and the demand for travel in the U.S. soars.
Consumers sinking low: A closely watched gauge of consumer sentiment from the University of Michigan has now fallen to a record low, sinking to 50.2 in June, down from 58.4 in May. It’s the lowest reading going back to 1952, and worse than the lows seen during the 2008 financial crisis.
"Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession," Joanne Hsu of the University of Michigan's Surveys of Consumers said in a statement.
The price of gasoline — always a sensitive issue in a country built on highways and suburban sprawl — seems to be playing an important role in the souring mood. “Overall, gas prices weighed heavily on consumers, which was no surprise given the 65 cent increase in national gas prices from last month,” Hsu said. “Half of all consumers spontaneously mentioned gas during their interviews, compared with 30% in May and only 13% a year ago. Consumers expect gas prices to continue to rise a median of 25 cents over the next year, more than double the May reading and the second highest since 2015.”
White House responds: Clearly threatened politically by the depth and persistence of the inflationary surge, President Joe Biden sought to reassure Americans Friday that the White House is focused on the issue, while also making it clear that he thinks others are to largely blame for the problem.
“Today’s report underscores why I have made fighting inflation my top economic priority,” Biden said in a statement. “While it is good to see critical ‘core’ inflation moderating, it is not coming down as sharply and as quickly as we must see. Putin’s Price Hike hit hard in May here and around the world.”
During a visit to Los Angeles, Biden slammed oil companies for earning record profits as fuel prices soar. “One thing I want to say about the oil companies: They have 9,000 permits to drill. They’re not drilling,” he said. “Why aren’t they drilling? Cause they make more money not producing more oil — the price goes up.”
Asked if he planned to target oil company profits, Biden singled out one company in particular for criticism: “Exxon made more money than God this year,” he said. “Exxon, start investing. Start paying your taxes.”
Summers warns: With the Fed facing the difficult task of cooling the economy without causing a recession, former Treasury Secretary Lawrence Summers chided the central bank for getting it wrong on inflation.
“It’s pretty clear that peak-inflation theory, like ‘transitory’ theory is kind of wrong,” Summers told Bloomberg Television. “The Fed’s forecasts from March, saying that inflation would be coming down to the 2s by the end of the year was, frankly, delusional when issued, and looks even more ridiculous today.”
Summers said the latest inflation numbers point to bigger interest rate hikes, lasting for a longer time — an increasingly popular view that helped send stocks sharply lower Friday as traders adjusted their expectations. “The debate has been between 25 and 50 basis point moves a couple months from now,” he said. “I think a more fruitful deliberation would be between 50 and 75 basis points.”
Separately, analysts at Barclays upped their forecast for the Fed’s rate hike in June: “We are changing our forecast to call for a 75bp hike on June 15.