Economic Forecasts

Inflation Surges Again in May

Kiplinger’s latest forecast on inflation

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Expect much higher inflation this year, with overall prices rising 5.0% over the course of the year, as a reopening economy, government stimulus, and shortages combine to push prices up in many areas. Prices rose 0.6% in May from April, the third large monthly increase in a row. Shortages of new cars and trucks due to a lack of computer chips, plus government stimulus checks, have created a run on used vehicles, whose prices surged 7.3% in May, following a 10.0% jump in April. These accounted for a third of the total price index increase in both months. Shortages of rental vehicles pushed rates up 12.1%, following 16% in April. Shortages of computer chips caused computer and television prices to rise; normally, these would have declined. Meat prices are still rising briskly.

Now that many vaccinations have been completed, people are starting to eat out and travel again. Restaurant prices rose 0.6% in May, and 4.0% from a year ago. Restaurants are facing increasing costs for both labor and food. Airfares surged 7.0% after a 10.2% jump in April, and hotel/motel rates are rising as well. Energy prices were flat, on average, as an increase in natural gas prices was matched by a dip in gasoline. However, more travel this summer could bump gasoline prices up in the coming months.

This surge in inflation is going to create a quandary for the Federal Reserve, since one of the Fed’s goals is to fight inflation. But Chair Jerome Powell has indicated a commitment to keeping short-term interest rates near zero in order to push down the unemployment rate, and his analysts tell him that the inflation surge is temporary. So, it is likely that the Fed will stand pat, but if consumer demand means that businesses now have pricing power, then this could create a self-fulfilling prophecy and leave the Fed playing catchup.

Print-ready Consumer Price Index chart

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