US Inflation Jumps to 8.6 Percent, Highest in 40 Years

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Analysts now predict aggressive Fed response and a bigger economic slowdown

The U.S. annual inflation rate surged to 8.6 percent in May, topping the market estimate of 8.3 percent.

According to data from the Bureau of Labor Statistics (BLS), the consumer price index (CPI) rose 1 percent on a month-over-month basis. Key drivers of inflation such as food, energy, and housing showed no signs of slowing last month.

The core inflation rate, which excludes the volatile food and energy sectors, climbed 6 percent year-over-year, higher than economists’ expectations of 5.9 percent. Core inflation jumped 0.6 percent month-over-month.

All of the inflation indexes ran high in May, with food prices soaring 10.1 percent and energy increasing 34.6 percent.

Fuel oil surged 106.7 percent, gasoline rose 48.7 percent, and electricity costs jumped 12 percent year-over-year.

In May, meat prices remained expensive as beef (+10.2 percent), pork (+13.3 percent), ham (+11.1 percent), and chicken (+17.4 percent) have all surged.

Eggs spiked 32.2 percent, while milk advanced 15.9 percent. Fruits and vegetables increased 8.2 percent. And coffee rose at a remarkable pace of 15.3 percent.

Shelter costs swelled 5.5 percent. Airline fares increased 37.8 percent as a result of increasing fuel prices and high travel demand.

New vehicles jumped 12.6 percent, while used cars and trucks rose 16.1 percent. Apparel prices swelled 5 percent.

The U.S. financial markets reacted negatively to the inflation data. The Dow Jones Industrial Average fell nearly 700 points and the Nasdaq Composite Index tumbled more than 3 percent. The S&P 500 dropped about 2.7 percent.

The yield on 2-year U.S. Treasury notes increased more than 17 basis points to 3 percent, reaching its highest level since June 2008.

This is “signaling that investors now expect that the Fed will have to raise the federal funds rate by another 200bps over the next 12 months,” Ed Yardeni, president of Yardeni Research said in an email to clients.

By Andrew Moran

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