The numbers: A key measure of U.S. inflation rose sharply again in May and showed prices rising at the fastest annual pace since 2008, signaling consumers can expect to pay more for goods and services over the summer as the economy recovers from the pandemic.
The so-called PCE prices index climbed 0.4% in May to mark the third straight big increase, new government figures show. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% advance.
The rate of PCE inflation is now almost double the Federal Reserve’s 2% goal, but senior officials have downplayed the increase. Fed leaders insist prices will ease next year as the economy returns to normal, most people go back to work and widespread shortages of labor and supplies fade away.
A separate measure of inflation that strips out food and energy also climbed to the highest level since 1992.
The core PCE price index moved up 0.5% in May. That nudged the increase over the past 12 months to 3.4% from 3.1%.
The PCE is the Fed’s preferred measure of inflation.
Read: The U.S. economy is running ‘very hot’, IHS Markit finds, and so is inflation
Big picture: Households are feeling the pinch of higher prices when they go to the grocery store, fill up their gas tanks or try to book a rental at a popular vacation spot. The cost of almost everything seems to be going up.
Read: Business investment is growing at the fastest pace in decades
The Fed pins most of the increase in prices on the reopening of the economy. A flood of pentup demand has overwhelmed businesses and in many cases they’ve raised prices, especially because they’re also grappling with shortages of key supplies and even labor.
Read: Unemployment claims barely fall and disappoint for second week in a row
For now most investors appear to have bought into the Fed’s argument. Stocks are still rising and yields on long-dated U.S. Treasurys have actually declined over the past few months.
Some economists worry the Fed is being too lax, however. They question whether prices will drop back to 2% in 2022 as the Fed expects.
The central bank itself has underestimated the increase in inflation. The Fed now expects PCE inflation to average 3.4% in 2021, up from a 1.8% forecast at the end of last year.
Even then, the Fed still predicts inflation will drop back to 2.1% by 2022.
Market reaction: The Dow Jones Industrial Average
and S&P 500
were set to open higher in Friday trades.