US consumer prices jump most since 2008, topping all estimates

New report may add to challenges for Biden administration to convince Congress to approve trillions of dollars in additional fiscal spending

The Federal Reserve says inflation is 'transitory'. AFP

Prices paid by US consumers surged in June by the most since 2008, topping all forecasts and complicating the Federal Reserve’s debate over how soon to unwind ultra-easy monetary support for the economy.

The consumer price index jumped 0.9 per cent in June and 5.4 per cent from the same month last year, according to Labour Department data released on Tuesday. Excluding the volatile food and energy components, the so-called core CPI rose 4.5 per cent from June 2020, the largest advance since November 1991.

Used vehicles accounted for more than a third of the gain in the CPI, the agency said. The outsize increase was also driven in large part by the pricing rebound in categories associated with a broader reopening of the economy including hotel stays, car rentals, apparel and airfares.

Expectations that those increases will normalise help explain the Fed’s view that inflation is transitory.

“Inflation surprised substantially to the upside in June but, once again, owing to outsize increases in prices in a few categories,” said Michelle Meyer, head of US economics at Bank of America. “This reinforces the idea of transitory inflation.”

The median forecasts in a Bloomberg survey of economists called for a 0.5 per cent gain in the overall CPI from the prior month and a 4.9 per cent year-over-year increase. The S&P 500 declined after the report, while the yield on the 10-year Treasury note eased and the dollar advanced.

The report also may add to challenges for the Joe Biden administration in convincing Congress to approve trillions of dollars in additional fiscal spending in coming years. Republicans have been highlighting the jump in inflation as a reason to reject such new plans.

The year-over-year figures have shown outsize gains in recent months partly because of so-called base effects — the CPI retreated from March through May of last year during the pandemic lockdowns. While the annual figures are expected to peak, it is not yet clear how much moderation will occur over the coming months.

In the three months through June, the core CPI increased at a more than 8 per cent annualised rate, the fastest since the early 1980s.

Household spending on merchandise, fuelled in part by government stimulus, has left businesses scrambling to fill orders while facing shortages of materials and labour. That dynamic is contributing to higher costs, which often feed through to consumer prices.

Meanwhile, the lifting of pandemic restrictions is propelling purchases of services like travel and transport, another contributor to inflationary pressures.

Household spending on merchandise, fuelled in part by government stimulus, has left businesses scrambling to fill orders. Bloomberg

Prices paid for new and used vehicles rose from a month earlier by the most on record. That said, those categories each make up less than 4 per cent of the overall CPI.

The cost of food away from home jumped 0.7 per cent on a month-over-month basis, the largest gain since 1981.

Fed Chair Jerome Powell has said that recent price increases are the result of transitory reopening effects, though more recently acknowledged the possibility of longer-term inflationary pressures. Sustained constraints in the production pipeline, along with a pickup in wages, raise the risk of an acceleration in consumer inflation.

“Bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect,” Mr Powell said after the June Federal Open Market Committee meeting.

Economists have been watching to see whether price pressures broaden out to categories other than those that are only now rebounding after pandemic-related lockdowns.

Shelter costs, which are seen as a more structural component of the CPI and make up a third of the overall index, rose 0.5 per cent last month, the most since October 2005. The gain was driven by a 7.9 per cent jump in hotel stays.

Wage growth rose steadily through the second quarter, but higher consumer prices are taking a toll. Inflation-adjusted average hourly earnings fell 1.7 per cent in June after slumping 2.9 per cent a month earlier, separate data showed Thursday.

Figures out on Tuesday from the National Federation of Independent Business showed 47 per cent of small-business owners, the largest share since 1981, reported higher selling prices in June.