U.S. consumer price index rises 5.4% in June as economy rebounds

Consumer prices in the United States rise rapidly in June, as the economic recovery gathered traction and demand outpaced the supply of labor and commodities.

The consumer price index rose 5.4 percent year on year, the biggest increase since shortly before the financial crisis. According to economists polled by The Wall Street Journal, the consumer-price index climbed 5 percent year on year in June.

Taking volatile food and energy costs out of the equation, the core CPI increased 4.5 percent, the most since September 1991 and well above the 3.8 percent projection while Journal predicted a 4 percent increase from the previous year.

This boost will put rising-price concerns front and center at the White House and the Federal Reserve.

The index tracks how much people pay for products and services such as clothing, food, restaurant meals, leisure activities, and automobiles. Economists believe it grew by 0.5 percent seasonally adjusted in June compared to May.

Rising prices reflect strong consumer demand, which has been bolstered by universal vaccinations, the elimination of many business restrictions, trillions of dollars in federal epidemic assistance, and large household savings.

In the first quarter, the United States' gross domestic product increased by 6.4 percent on a seasonally adjusted yearly basis. Economists polled by the Journal in July predicted that the economy grew at a 9.1 percent annual pace in the second quarter, putting the economy on track for its strongest year since the early 1980s.

Comparisons with statistics from last year's Covid-19 lockdowns, when prices dropped due to falling demand for numerous products and services, amplify annual inflation readings. This so-called base effect is likely to raise inflation estimates in June before declining in the fall.

In May, total prices climbed by a more subdued 2.5 percent compared to the previous year. Overall prices, however, increased at a 9.7 percent annualized pace in the three months ending in May.

Investors, lawmakers, and central bank officials are all keeping a careful eye on the developments. Quick price increases can pressure consumers if wages do not keep pace, and if they look to be sustained, it could prod the central bank to pull back on support for the economy.

Policymakers anticipate that inflation would decline as the economy recovers from a turbulent and unusual pandemic outbreak phase, but how fast this will occur is unknown. Prices have risen faster than the Fed projected earlier this year, certain indicators of consumer inflation expectations are beginning to increase – a feature that may make inflation a self-fulfilling prophesy – and some central bank officials are becoming cautious of the developments, NYT reported. 

With inputs from WSJ