Inflation hits new 40-year high in May as consumer prices rise 8.6%

Inflation remained painfully high in May, with consumer prices hitting a new four-decade high that exacerbated financial strain for millions of Americans and exacerbated a political crisis for President Biden.

The Labor Department said on Friday that the consumer price index, a broad measure of the price of everyday goods including gasoline, groceries and rents, rose 8.6% in May from a year earlier. Prices rose 1% in the one-month period from April. Those numbers were higher than the 8.3% headlines and the 0.7% monthly gain predicted by economists at Refinitiv.

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He marks the faster pace of inflation since December 1981.

So-called price cores, which exclude more volatile food and energy measures, were up 6% from a year earlier, also more than Refinitiv had expected. Basic prices also rose 0.6% month on month, suggesting that underlying inflationary pressures remain strong.

“What an ugly impression the CPI. Not only was it higher than expected on almost all fronts, the pressures were clearly evident in the tighter parts of the market,” said Seema Shah, chief strategist at Principal Global Investors. “The decline in inflation, when it finally does, will be painfully slow.”

Price increases were widespread: energy prices rose 3.9% in May from the previous month and rose 34.6% from last year. Gasoline, on average, costs 48.7% more than a year ago and 7.8% more than in April. All in all, fuel prices rose 16.9% in May on a monthly basis, pushing the one-year rise to a staggering 106.7%.

In another worrying sign, housing costs – which account for about a third of the CPI – accelerated in May, rising 0.6% in May. It marked the fastest one-month gain since 2004. On an annual basis, shelter costs rose 5.5%, the fastest since February 1991.

Food prices also rose 10.1% on the year and 1.2% on the month, with the biggest increases in dairy products (up 2.9%, the biggest monthly increase since July 2007), non-alcoholic beverages ( 1.7%), cereals and bakery products (1.5%) and meat, poultry, fish and eggs rose (1.1%).

Shoppers wait in line at the checkout counter at a Costco wholesale store in Orlando. Costco saw a double-digit increase in sales during the third quarter and a record number of new members as consumers look for ways to combat rising food prices caused by inflation. ((Photo by Paul Hennessy/SOPA Images/LightRocket via Getty Images)/Getty Images)

Sizzling inflation has created severe financial pressures for most American families, who are forced to pay more daily necessities like food, gas and rent. The burden is disproportionately borne by low-income Americans, whose already strained wages are heavily impacted by price fluctuations.

Rising prices are eroding the strong wage gains American workers have seen in recent months: The average real hourly wage fell 0.6% in May from a month earlier, as rising inflation eroded the total wage gain of 0.3%, according to the Department of Labor. On an annual basis, real profit fell 3% in May.

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Rampant inflation has become a major political responsibility for Biden ahead of November’s midterm elections, in which Democrats are expected to lose their already tiny majorities. Polls show that Americans see inflation as the biggest problem facing the country — and that many families blame Biden for the price rise.

The hotter-than-expected report will also have big implications for the Federal Reserve, likely solidifying a series of aggressive rate hikes as central bank officials try to tame inflation. Policymakers already raised the benchmark interest rate by 50 basis points – double the usual size – in May and are expected to approve at least two more similarly sized increases in June and July.

Biden inflation

U.S. President Joe Biden speaks during a visit to a family farm in Kankakee, Illinois, U.S., Wednesday, May 11, 2022. (Photographer: Taylor Glascock/Bloomberg via Getty Images/Getty Images)

Close to 98% of investors now expect the Fed to make another half-point hike in September as inflation remains stubbornly high, according to the CME FedWatch tool.

Still, the Fed is in a precarious position as it walks the line between cooling consumer demand and bringing inflation closer to its 2% target, without inadvertently dragging the economy into recession. Raising rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut spending.

“The Fed is now between a rock and a very difficult place,” said Peter Earle, a researcher at the American Institute of Economic Research. “Acting more aggressively to contain rising prices increases the likelihood of causing a recession.”

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