U.S. inflation unexpectedly accelerates to 40-year high of 8.6%


U.S. consumer prices accelerated in May as gasoline prices hit a record high and the cost of food soared, leading to the largest annual increase in nearly 40-1/2 years, suggesting that the Federal Reserve could continue with its 50 basis points interest rate hikes through September to combat inflation.

The faster-than-expected increase in inflation last month reported by the Labor Department on Friday also reflected a surge in rents, which increased by the most since 1990. The relentless price pressures are forcing Americans to change their spending habits and will certainly heighten fears of either an outright recession or period of very slow growth.

High inflation also poses a political risk for President Joe Biden and his Democratic Party heading into the mid-term elections in November.

"There's little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The Fed might still raise policy rates 'just' 50 basis points next week, but it could easily ratchet up the pace beyond then if inflation keeps surprising to the high side."

The consumer price index increased 1.0% last month after gaining 0.3% in April.

Gasoline prices rebounded 4.1% after falling 6.1% in April. Prices at the pump shot up in May, averaging around $4.37 per gallon, according to data from AAA. They were flirting with $5 per gallon on Friday, indicating that the monthly CPI would remain elevated in June.

Food prices jumped 1.2%. Prices of dairy and related products rose 2.9%, the largest gain since July 2007. Food prices have soared following Russia's unprovoked war against Ukraine.

China's zero COVID-19 policy, which dislocated supply chains, is also seen as keeping goods prices strong.

Economists polled by Reuters had forecast the monthly CPI picking up 0.7%. In the 12 months through May, the CPI increased 8.6%. That was the largest year-on-year increase since December 1981 and followed an 8.3% advance in April. Economists had hoped that the annual CPI rate peaked in April.

The inflation report was published ahead of an anticipated second 50 basis points rate hike from the Fed next Wednesday. The U.S. central bank is expected to raise its policy interest rate by an additional half a percentage point in July. It has hiked the overnight rate by 75 basis points since March.

U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices were mixed.


Underlying inflation was equally strong last month as prices for services like rents, hotel accommodation, and airline travel maintained their upward push. There had been hoping that the shift in spending from goods to services would help to cool inflation. But a tight labor market is driving up wages, contributing to higher prices for services.

Excluding the volatile food and energy components, the CPI climbed 0.6% after advancing by the same margin in April.

The so-called core CPI increased 6.0% in the 12-months through May. That followed a 6.2% rise in April. Inflation by all measures has far exceeded the Fed's 2% target.

The core CPI was lifted by rents, with owners' equivalent rent of primary residence, which is what a homeowner would receive from renting a home, rising a solid 0.6%. That was the largest increase since August 1990.

Airline fares increased 12.6% after surging 18.6% in April. Used cars and trucks prices rebounded 1.8% after declining for three straight months. New motor vehicle prices rose a solid 1.0%, while the cost of medical care increased 0.4%.

Consumers also paid more for household furnishings and operations as well as recreation. Apparel prices rose 0.7%. There were also increases in the cost of motor vehicle insurance, personal care, education, and tobacco.

There's a Social Security benefits cliff looming, with retirees seeing their checks garnished as soon as 2035.

According to the latest federal Social Security report, the program has just enough funding to send out monthly checks to older Americans and those with disabilities for 13 years. Beyond that, a 20% reduction in benefits is needed for the program to be sustainable.

"In the coming decades it will be vital for Congress to take steps to put Social Security and Medicare on a solid financial footing for the long term," Treasury Secretary Janet Yellen said in a statement on the Social Security report.

Sen. Bernie Sanders — alongside Sen. Elizabeth Warren and a bevy of other Democrats — are putting forward a plan to change that.

Their proposal: a bill that would increase the benefit by $2,400 a year and fully fund the program through 2096. 

To pay for it, the Democrats are proposing a raise to the earnings cap for paying into Social Security. Right now, Americans are taxed only on their first $147,000 in income to pay for Social Security; earnings beyond that are not touched. 

Sanders' Social Security Expansion Act "would lift this cap and subject all income above $250,000 to the Social Security payroll tax," according to a fact sheet released by the senator.

Raising the income threshold isn't a new concept, and it's one that Sen. Joe Manchin, a key centrist, has already expressed support for. Earlier this year, the Democrat from West Virginia said the payroll-tax cap should be taken up to $400,000 to put Social Security on a more sustainable fiscal path.

While Sanders' plan is one solution to patching the ailing — and popular — program, Republicans indicated that it wouldn't draw their votes. They tend to resist tax increases to fund more generous safety net benefits, favoring other fixes.

Sen. Lindsey Graham of South Carolina, the ranking member of the Senate Budget Committee, suggested in a Thursday congressional hearing that the program's retirement age would probably need to be raised, a step that Sen. Mitt Romney expressed support for earlier this year. Romney previously proposed the TRUST Act, a bipartisan bill directed at helping fix Social Security and other ailing programs. Critics said that legislation might end up cutting some benefits.

"Sen. Sanders makes a wonderful plea, which many, many people agree with — the need for helping our seniors and providing better benefits for them and so forth," Romney, a Republican from Utah, said during a Senate Budget Committee hearing. "But recognize this bill has no chance whatsoever of receiving a single Republican vote in either house."

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