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Inflation worsened in May, rising much more than expected on surging food, rent and energy costs, the Bureau of Labor Statistics reported on Friday.
The monthly gain was 1%, well above forecasts of 0.7%, and the annual rise of 8.6% exceeded expectations, following an 8.3% increase in April.
Energy prices rose 3.9% in May, with gasoline spiking 4.1%. Food costs, meanwhile, rose 1.2%.
Core inflation, which strips out often volatile energy and food costs, rose 0.6% for the month and 6% on an annualized basis. The monthly increase was unchanged from April but the yearly increase was slightly below the rate in April.
The reading is the last the Federal Reserve will have on hand when it meets next week with its policymaking committee widely expected to announce a 50 basis point increase in interest rates. That will follow a similar hike in May.
“Inflation likely has peaked in year-over-year terms but will stay well above the Fed’s target through the end of 2022 as Russia-Ukraine keeps food and energy prices elevated,” Bill Adams, chief economist at Comerica Bank wrote ahead of the report’s release.
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“Prices of durable goods including used cars and trucks have started to edge back down, and wage growth is slowing,” Adams said. “Retailers are starting to discount consumer goods again after a big increase in inventories since the fall of 2021. But there is no relief in sight for food, gasoline, diesel, and other energy prices as the Russia-Ukraine conflict grinds on.”
One area where inflation is starting to abate is online spending. In May, online prices increased just 2.06% from a year ago, down from April’s 2.9% rise and March’s 3.6% jump, according to data collected by Adobe Analytics.
Electronic goods and apparel led the slowdown, with drops of 6.5% and 9% from year-ago levels. One category that did not decline was groceries, which rose 11.7% in May.
“Slower consumer spending on discretionary items has driven slower, single digit e-commerce growth since March, and this pullback mirrors the easing in online inflation,” said Patrick Brown, vice president of growth marketing and insights at Adobe.
A key driver in overall inflation has been Russia’s invasion of Ukraine, which is now in its fourth month. As major energy and agricultural producers and exporters, the two countries have seen their economies battered and supplies interrupted.
“The war in Ukraine has impacted commodities and made the inflation trend even worse,” says Agathe Demarais, global forecasting director at the Economist Intelligence Unit.
Still, she does not see a recession in the cards for the U.S., at least not yet.
“Are we heading into a recession in the U.S.?” she asks. “So far we don’t see that. Our forecast is for 2.3% growth this year.”
The CPI report will put added pressure on President Joe Biden and Democrats, who have been on the defensive about runaway inflation that last year they termed “transitory” and the result of disruptions to the global economy caused by the coronavirus pandemic. But inflation has proved more dogged and especially energy and food prices. Those have been particularly affected by the war in Ukraine.
The U.S. is hardly alone in facing rampant inflation. The European Central Bank on Thursday announced plans to raise interest rates in July while also ratcheting up its inflation forecasts and downgrading economic growth projections.
Inflation is now expected to hit 6.8% in 2022, dropping to 3.5% in 2023 and 2.1% in 2024. In March, the central bank’s projections were for 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.
Economic growth is now expected to be 2.8% in 2022 and 2.1% in 2023, compared with March’s estimates of 3.7% in 2022 and 2.8% in 2023.