The most recent inflation figures, released Thursday by the Bureau of Labor Statistics, are not rattling the Biden administration nor the Fed. Both predict that prices will continue to rise until supply chains and consumer demand recalibrate and the economy recovers. The Fed, which is charged with keeping prices stable and unemployment low, says it won’t rush to raise interest rates and tamp down on inflation until the labor market has time to heal.
“As the virus is contained, the economy is improving, step-by-step,” tweeted Heather Boushey of the White House’s Council of Economic Advisers. “Today’s data on inflation is the latest indicator that things are both moving in the right direction and that we have supply-chain hiccups.”
The White House and Democrats in Congress argue that rising inflation is not only temporary, but that it’s also a feature of a rebounding economy. More widespread vaccinations and lower covid case counts are helping Americans return to their old spending habits and unleash months of pent-up savings. The economy added 559,000 jobs in May, and the first four months of Biden’s presidency have seen more than two million jobs added back on the payrolls.
Yet Republicans have a much different diagnosis of the economy, and they seized on Thursday’s inflation data to issue their latest warnings. The GOP points to the $1.9 trillion stimulus package Biden signed in March, arguing that such a sprawling bill will overwhelm the economy and put the Fed behind the curve when it comes to reigning in inflation.
“Massive stimulus spending is a contributing factor,” tweeted Sen. Mike Crapo (R-Idaho). “Proposals for further federal spending, coupled with job-killing tax hikes, are not the remedy for economic recovery.”
The labor data also showed that prices rose 0.6 percent in the past month.
The price of used cars and trucks continued to surge, rising 7.3 percent in May compared to April. That followed a 10 percent increase in April.
A complicated and unusual range of factors have seized on the market for used cars and rental cars, triggering nationwide shortages. Many rental car companies sold their fleets during the pandemic, leaving them scrambling as Americans start traveling again. On the supply chain side, a shortage of semiconductors has also made it hard for companies to restock their lots.
Prices for household furnishings and services increased 1.3 percent in May, its largest monthly increase since January 1976, according to the Bureau of Labor Statistics. The indexes for domestic services, along with categories tracking furniture and bedding, helped drive the increase.
“We are entering what will no doubt be a long, hot summer as consumers continue to spend faster than most producers and service providers can keep up,” wrote Grant Thornton chief economist Diane Swonk in an analyst note.
The Fed is charged with keeping prices stable and the unemployment rate low. And for now, it is not rushing to control inflation until substantial progress has been made in the labor market, which is still down 7 million jobs.
On Saturday, Treasury Secretary Janet Yellen said inflation could rise as high as 3 percent over the entire year, which would be considered high for the United States. Still, it’s unclear just how high inflation will be allowed to climb, and for how long, before policymakers in the administration and the Fed see cause for concern.
Fed and administration officials point to factors that, they say, are temporarily driving prices up. Demand for goods and services — including on things such as concert tickets and restaurants — is rebounding as more people become vaccinated and are eager to unleash pent-up savings. Meanwhile, supply chains are struggling to catch up. Economists say that those bottlenecks will smooth out over time — and require patience from consumers and policymakers alike.
“Consumers will still have to deal with transitory price increases and either accept them or make other choices,” wrote Joe Brusuelas, chief economist at RSM, in an analyst note.
Airline tickets are a prime example. Prices rose 7 percent in May after surging 10.2 percent in April.
But in some instances, prices are already starting to cool down. Data show that prices for hotels and motels rose 7.6 percent in April. They increased only 0.4 percent in May.
Some economists are eyeing the cost of rent, which makes up a large share of many Americans’ budgets. Rental prices didn’t swing wildly during the pandemic and only increased 0.2 percent in May. But it’s still up 1.8 percent over last year. Once rent rises and tenant are locked into leases, it may be harder for rent to fall back down. Only time may tell.
Generally, policymakers expect inflation figures to taper off in the year to come. That’s in part because the super-low readings from the pandemic’s early days will gradually shift out of the calculation.
“While, no doubt, the top-line increase in inflation will command the attention of policymakers at the Federal Reserve, the underlying tone and tenor of the data will not result in any change of policy,” Brusuelas wrote.
Andrew Van Dam contributed to this report.
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