Thursday June 10, 2021
“Feared Five is Reality”
US inflation not seen since 2008
In May, US inflation rose to its highest level in more than a year. The Fed sees this as a temporary phenomenon and some experts also expect a normalization. One reason for the current high is the chip crisis.
In the USA, inflation rose surprisingly again in May. Compared to the same month last year, the cost of living increased by 5.0 percent, such as the Department of Labor in Washington announced. “The dreaded five has become a reality,” said Thomas Altmann from QC Partners. That is the highest rate since August 2008. In April it was 4.2 percent. This value was already higher than expected by experts. For May, analysts had expected an increase of just 4.7 percent.
The sharp rise impressively shows that the price surge in April was not a slip-up, said LBBW analyst Dirk Chlench. “The US Federal Reserve is coming under increasing pressure to reconsider its view that the latest price hikes are only temporary.” Compared to the previous month, consumer prices rose by 0.6 percent in May. This is a decrease compared to the inflation rate of 0.8 percent in April, but experts had expected a value of 0.5 percent.
Nevertheless, many experts believe that the development is based primarily on temporary factors: “In the summer months, the price level should slowly drop from a high level,” said chief economist Thomas Gitzel from VP Bank. “The corona pandemic has shaken up the price structure so much that there are a number of effects that are difficult to calculate.”
The US service sector is running in normal mode again in many places, prices for air travel and hotel accommodation are picking up again and are well above the previous year’s level. “So there are so-called base effects at work once more.” At the same time, the shortage of semiconductors is now at least indirectly affecting consumer prices. If there are no new cars due to a lack of semiconductors, customers switched to used cars. These would have become significantly more expensive. According to the Ministry of Labor, the used cars and trucks category alone is responsible for around a third of the monthly price increase.
Fed is meeting next week
Core inflation, excluding components that often fluctuate in price, such as energy and food, was 3.8 percent in May compared with the same month last year. The last time there was such a sharp increase was in 1992. In April, the core inflation rate was 3.0 percent, analysts had expected 3.5 percent for May.
The US Federal Reserve (Fed) is closely monitoring price developments. According to its own information, however, it assumes that inflation will only pick up temporarily. Because compared to the previous year, there are high rates of price increases due to the economic downturn in 2020. The Fed, which is meeting next week for the interest rate meeting, continues to support the economy with monthly cash injections of 120 billion dollars, despite the upturn in the economy.
It intends to hold on to bond purchases until substantial progress has been made on price stability and unemployment. However, the monthly labor market report had recently disappointed. Fed Vice President Randal Quarles has signaled that he is open to talks about the bond program.
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