US inflation hit a 13-year high in June, driven by a rise in the cost of used cars.
Consumer prices rose 5.4% in the 12 months to the end of June, up from 5% the previous month, the largest increase since August 2008.
The jump in prices will put pressure on the Federal Reserve to tighten monetary policy sooner than expected, which could in turn dampen a consumer-led recovery and drive demands for wage increases.
In its latest report, the US Labor Department released data showing that consumer prices rose 0.9% in June – more than economists expected – making it the largest monthly gain since June 2008.
Inflation has been rising as the economy reopens from coronavirus lockdowns, with a record 10.5% jump in the price of previously owned vehicles, according to the Bureau of Labor Statistics.
While consumers express confidence in the US economy, the latest figures will put pressure on Federal Reserve chair Jerome Powell to answer questions on the central bank’s concern about rising prices when he testifies before Congress on Wednesday and Thursday.
Minutes from its most recent policy meeting released last week showed that officials felt substantial further progress on the post-pandemic economic recovery “was generally seen as not having yet been met”.
“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,” Powell said at the meeting.
Central bankers agreed that they should be ready to act if inflation proved to be longer lasting than transitory supply-chain issues related to economic reopening. As it stands, the Fed is not expected to raise interest rates until the end of 2022 or early 2023.
Andrew Hunter, senior US economist at Capital Economics, wrote in a note to investors that the US inflation scare is “far from over” and that temporary shortages and supply bottlenecks stemming from the pandemic are still putting significant upward pressure on prices.
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However, Hunter noted “the bigger concern is that inflationary pressures are also now clearly building in more cyclically sensitive sectors, which could prove longer lasting”.
US consumers, perhaps buoyed by continuing pandemic-related government support, continue to express economic confidence overall. On Monday, the White House issued a statement pointing to a Gallup poll that found almost 60% of Americans say they are thriving.
Separately, US consumer confidence soared in June to a post-pandemic high of 127.3 against 120 points a month earlier. The figure exceeded forecasts by most economists, although consumers said they expected inflation to pick up over the coming year.