US Consumer Price Jump Resembles 2008 Financial Crisis

Jun 11, 2021

US inflation rate has jumped to the highest level it’s been since the 2008 financial crisis. The rebound from the COVID-19 pandemic has left the world’s largest economy in a bind. The consumer price index (CPI) for May indicated a 5% annual rise – the highest since August 2008. In addition, the core inflation rate, which excludes food and energy prices, saw an increase of 3.8%, recording the sharpest increase in practically three decades.

The increase of the consumer price index indicates rising inflation, which has been climbing since the beginning of the year when it was 1.4%. As a result, investors have been crippled with fear that pent-up demand and supply bottlenecks would create inflationary pressures, forcing the Fed to scale back on the stimulus programme.

Breakdown

Reportedly, used vehicle sales rose by 7.3% this month, or 29.7% over the past year, accounting for a significant portion of the CPI. On the other hand, prices of new vehicles were up only 1.6% this month. It sounds significantly smaller, but it indicates the biggest gain since October 2009.

The gasoline index was up 56.2% year-over-year; however, that didn’t affect the energy index. The food index also remained relatively stable with a rise of 0.4%, the same as the previous month. Food prices didn’t budge much either, rising a mere 2.2% over the past 12 months.

It appears that markets shrugged off the inflation reports. “US stocks rallied to a fresh record high after investors realized the punchbowl of stimulus is not going away any time soon,” commented Edward Moya of Oanda.

Light at the end of the tunnel

As the economy continues to recover, the prices are surging. Household furnishings and operations rose 1.3% in the highest month-over-month gain since January 1976. Transportation rentals and airline tickets also continued their steady climb, along with hotels and motels. So, although core inflation leapt to the highest it’s been since 1992, the overall picture remains relatively positive.

“Before hitting the panic button, investors should recognize that used cars, auto insurance, and airfares drove nearly half of the core CPI increase,” commented Ron Temple, head of US equities at Lazard Asset Management.

“These increases are all easily explained by depressed prices a year ago and the semiconductor shortage that has turbocharged 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 rejoin the labour force,” he added.

At the same time, weekly unemployment claims continued to scale lower. Reportedly, 376,000 claims came through in May, indicating a decline of 9,000 from the week before. It is expected that the hiring will continue to soar as more Americans get their jabs and companies increase their workforce to meet the growing demand.