Inflation in the United States has hit its highest rate since 2008, as the world’s largest economy rebounds strongly from the coronavirus crisis.
The consumer price index rose at an annual rate of 5% in May, down from 4.2% in April and the highest since August 2008, according to the United States Bureau of Labor Statistics. Inflation has been on the rise since January, when it was 1.4%.
Fears about rising prices in the United States have gripped markets, with investors worried that pent-up demand and supply chain bottlenecks are creating inflationary pressures, forcing Federal Reserve central bankers to slow down their stimulus program.
But US stocks rallied at the news, with the S&P 500 hitting a new high as traders anticipated the inflationary surge would be temporary, allowing the Fed to delay cutting back on a bond buying policy that has injected money into world markets.
US stocks hit a new high after investors realized the stimulus punch was not going to go away anytime soon, said Edward Moya of the Oanda trading platform.
Core inflation, which excludes volatile items such as food and energy, reached its highest level since 1992. It rose 3.8% year-on-year, from 3% in April.
Other official data has shown that the number of initial jobless claims fell to its lowest since mid-March 2020, when the first wave of Covid-19 hit. There were 376,000 initial claims for state unemployment benefits last week, a drop of 9,000 from 385,000 the week before and a low of nearly 15 months.
This continues the steady decline in jobless claims in recent months, as the rapid Covid-19 vaccination program has allowed the US economy to reopen and begin a recovery.
The cost of used cars and trucks climbed 7.3% in May from April, a third of the increase in inflation. Prices increased 29.7% from the previous year. They have increased in recent months due to a global semiconductor shortage that has held back auto production, pushing people to enter the used vehicle market instead.
Energy prices were also up 28.5% year on year, including a 56% jump in gasoline prices from May 2020, when demand slumped due to the pandemic.
The cost of thefts, furniture, new cars, rental cars and clothing increased in May.
However, there was no need to panic about the surge in US inflation, said Ron Temple, head of US equities at Lazard Asset Management. Before hitting the panic button, investors need to recognize that used cars, auto insurance and air fares have driven nearly half of the core CPI increase.
These increases are all easily explained by the drop in prices of a year ago and the shortage of semiconductors that drove up used car prices. The next few months are likely to be noisy, and investors should focus on data this fall when schools are fully reopened and several million workers can re-enter the workforce.
The S&P 500 hit a new record high of 4,249.74 after the inflation report, before pulling back a bit.
Alastair George, chief investment strategist at investment firm Edison Group, said: There is a lot of debate about the specter of rapidly rising inflation pressuring central banks to raise rates , or an unwanted liquidation of the bond market.
We think the data is still very noisy and says more about how quickly demand rebounds, which is welcome, rather than any signal on the long-term inflation outlook.
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