Chart of the Week: Transitory forces push up US inflation

In May, US consumer prices increased 5% over the same period twelve months ago, the fastest rate of increase since September 2008. While an increase in headline inflation was to be expected as rising commodity prices fed through into energy prices, the movement in core inflation, which strips out the effects of food and energy prices, was more interesting. It rose 3.8%, the fastest rate of growth since 1992. Most Federal Reserve officials still believe this surge in inflation will be transitory, in part because some of the rise is due to ‘base effects’. Prices fell in the comparison period one year ago at the onset of the pandemic, which makes current prices look relatively higher. A disproportionately large share of core price pressures comes from a relatively small number of reopening-sensitive sectors. The index is being pushed up by a 30% surge over the same period a year ago in the prices of used cars and trucks, as a semiconductor shortage has impacted new car production. While some of the key drivers of the rising inflation rate are transitory, it remains to be seen how supply shortages and potential rising demand could affect prices in the medium term.