Inflation Rose To 5% In May, Increasing Fears Of Overheating

Consumer prices increased 5% for the year ending May, according to a report released on Thursday by the Department of Labor.

The increased numbers from the consumer price index mark the largest 12-month increase since a 5.4% increase for the period ending August 2008. The numbers were also higher than what forecasters had estimated, which will likely bolster the fears that inflation might be getting out of hand.

“Consumer prices are continuing to move up on base effects, supply chain disruptions, as well as the reopening. Stronger demand, especially for services, as well as supply bottlenecks will provide a lift in the near term,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “But the pace should stabilize and moderate as reopening effects fade and once supply catches up.”

Some economists are warning of too-high inflation and have cautioned that the economy is now at risk of overheating given the Federal Reserve’s monetary policies and the large amount of federal spending that has been infused into the economy, which is simultaneously experiencing a glut in demand as the pandemic abates.

The Fed has said that it does not intend to veer from its course of ultra-low interest rates until there is 2% sustained growth and maximum employment. The central bank said it anticipates breaching that 2% figure but said that the increase would be transitory and the numbers will settle down next year. Still, some are worried about the Fed’s approach.

Despite the high level of yearly consumer price growth, Selin Ilik, a senior account executive at Grayling, said this month’s uptick was “inevitable,” given that the consumer price index hit its lowest point in May of last year during the pandemic.

“This, combined with strong recent price growth in some specific areas, meant that the year-on-year inflation figure was inevitably going to be big,” Ilik said.

After Thursday morning’s report, Pennsylvania Sen. Pat Toomey, the top banking committee Republican, said it is “long overdue” for the Fed to begin normalizing its monetary policy.

“The combination of the Fed’s average inflation targeting and its view that inflation will be transitory virtually guarantees the Fed will be behind the curve if inflation is enduring,” Toomey said. “Congress’s massive spending contributes to the problem. It’s time to end it.”

Bill Dudley, the former president of the Federal Reserve Bank of New York, cautioned this week that the central bank’s approach to managing inflation risks recession. He warned that if overheating becomes too much, the Fed might have to pump the brakes and raise interest rates, which could cause increased volatility in short-term rates and an increased likelihood of an “economic hard landing.”

Treasury Secretary Janet Yellen said this weekend that the country could see inflation up to 3% through the rest of the year. Yellen also said that it would be a plus for society’s point of view and the Fed’s point of view if the country ends up with a slightly higher interest rate environment, although she later walked back those remarks and said that she doesn’t “see any evidence that inflation expectations are getting out of control.”

Even as the economy heats up and prices increase, there are concerns about labor shortages in the U.S. Some leading economists have suggested that the federal government’s expanded unemployment program is keeping people from the workforce because of its generous payouts.

The May jobs report fell somewhat short of expectations, reigniting concerns about a labor shortage. The economy added 559,000 new jobs, as opposed to predictions of 650,000. The report from the month before was even more disappointing.

Author: Zachary Halaschak

Source: Washington Examiner: Inflation rose to 5% in May, increasing fears of overheating

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