US inflation again defies expectations and climbs to new 40-year high of 8.6%

The cost of gas, food and other necessities skyrocketed in May, pushing US inflation to a new four-decade level and leaving US households no respite from rising costs.

Consumer prices rose 8.6 percent last month from 12 months earlier, faster than the 8.3 percent year-over-year increase in April, the Labor Department said Friday.

On a monthly basis, prices rose 1% in May alone, up sharply from the 0.3 percent increase from March to April. Much higher gas prices were responsible for most of that increase.

America’s rampant inflation puts a lot of pressure on families, forcing them to pay much more for food, gas and rent, and reducing their ability to afford discretionary items, from haircuts to electronics. Lower-income, black and Hispanic Americans are especially struggling because, on average, a larger portion of their income is consumed by necessities.

Economists expect inflation to decline this year, albeit not by much. Some analysts have predicted that the inflation gauge the government reported Friday — the consumer price index — could fall below seven percent by the end of the year. In March, the annualized CPI reached 8.5 percent, the highest rate since 1982.

Rate increases coming soon

High inflation has also forced the Federal Reserve into what will likely be the fastest series of rate hikes in three decades. By aggressively raising borrowing costs, the Fed hopes to cool spending and growth enough to curb inflation without sending the economy into recession. It will be a difficult balancing act for the central bank.

Surveys show that Americans view high inflation as the nation’s biggest problem, and most disapprove of President Joe Biden’s handling of the economy. Congressional Republicans are hammering Democrats on the issue ahead of midterm elections this fall.

Inflation has remained high, even as the sources of rising prices have shifted. Initially, robust demand for goods from Americans stuck at home for months after COVID-19 hit caused supply chain shortages and hitches and pushed up prices for cars, furniture and appliances.

As Americans return to spending on services including travel, entertainment and dining out, the cost of airfare, hotel rooms and restaurant meals has skyrocketed. The Russian invasion of Ukraine has further pushed up oil and natural gas prices.

Retailers warn that consumers are giving up

Commodity prices are expected to fall in the coming months. Many major retailers, including Target, Walmart, and Macy’s, have reported that they are now stuck with too much of the patio furniture, electronics, and other goods they ordered when those items were in demand, and they will have to discount.

Yet rising gas prices are hurting the finances of millions of Americans. Pump prices are averaging close to $5 a gallon nationwide, moving closer to the inflation-adjusted record of about $5.40 set in 2008.

Research from the Bank of America Institute, which uses anonymous data from millions of their customers’ credit and debit card accounts, shows that spending on gas consumes a larger portion of the consumer budget and crowds out their ability to purchase other items.

For lower-income households — defined as those with incomes less than $50,000 — gas spending reached nearly 10 percent of all credit and debit card spending in the last week of May, the institute said in a report this week. That’s up from about 7.5 percent in February, a sharp increase in such a short period.

Spending by all of the bank’s customers on durable goods, such as furniture, electronics and home improvement, has fallen from a year ago, the institute found. But their spending on airfare, hotels and entertainment continues to rise.

Economists have pointed to that shift in spending from goods to services as a trend that should help lower inflation toward the end of the year. But as wages for many workers rise steadily, prices in the service sector are also rising.

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