Inflation rose at the fastest pace in nearly 13 years in June amid a surge in used car costs and increases in food and energy prices, the Labor Department reported Tuesday.
The consumer price index rose 5.4% year-on-year, the largest increase since August 2008, just before the worst of the financial crisis. Economists polled by Dow Jones had expected an increase of 5%.
Excluding volatile food and energy prices, core CPI rose 4.5%, the strongest move for the metric since September 1991 and well above the 3.8% estimate.
On a monthly basis, headline and core prices rose 0.9% compared to the estimates of 0.5%.
Stock market futures fell on the report, while the sharp fall in government bond yields was mixed.
“What this really shows is that inflationary pressures remain more acute than estimated and will be with us for longer,” said Sarah House, senior economist at Wells Fargo’s corporate and investment bank. “We see areas where there will be sustained inflationary pressures even after we have some of these acute price increases in a handful of sectors.”
A separate report from the Department of Labor’s Bureau of Labor Statistics found that the sharp monthly rise in consumer prices resulted in negative real wages for workers. Real average hourly wages fell 0.5% during the month as a 0.3% increase in average hourly wages was more than offset by the rise in CPI.
Inflation has escalated due to a number of factors including supply chain bottlenecks, exceptionally high demand as the Covid-19 pandemic weakened, and year-on-year comparisons with a period when the economy struggled during the first few months of the crisis to open again.
Federal Reserve and White House policymakers expect current pressures to ease, despite central bank officials admitting that inflation is higher and perhaps more permanent than they expected.
“We think it is very important to eradicate the sectors affected by the pandemic,” a senior White House economic advisor told CNBC.com. “We’re not saying these pandemic risks aren’t real. We’re not ignoring them, but we’re also trying to put them in a longer-term perspective as the underlying price index outside the pandemic hit areas is pretty tame. “
Fed Chairman Jerome Powell will likely be asked his opinion on inflation when he speaks to House and Senate bodies on Wednesday and Thursday. Powell stood firm that inflationary pressures are primarily transitory, despite a Fed report on Friday indicated that upside risks are mounting.
“This increases some of the nervousness in some [Fed] Members, “said Wells Fargos House.” We saw at the June meeting that they were more concerned about inflation. When you look through this, there are a number of areas where inflation is picking up and likely to have staying power. That will make some people nervous. “
Much of the price pressure came from sectors particularly affected by the shutdown – used car prices, airfares and transportation costs, to name just three.
This was also the case last month, when used car and truck prices rose 10.5%, accounting for more than a third of all gains in the price index. In the 12-month period, used car and truck prices rose by 45.2%.
Food and energy prices also rose significantly by 0.8% and 1.5%, respectively. The gasoline index rose 2.5% in June and has risen 45.1% over the past 12 months. Food has increased by 2.4% in the last year.
However, apartment and lodging prices continue to rise, reinforcing the notion that inflation may linger for a while.
Shelter makes up almost a third of the CPI, increasing 0.5% on the month and 2.6% from June 2020.
According to a New York Fed poll released Monday, consumers are seeing an overall price increase of 4.8% over the next 12 months, although a separate Bank of America poll on Tuesday showed that professional investors were more likely to believe that the Inflation will be temporary.
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