The annual rate of inflation as measured by the Consumer Price Index (CPI) surged to a new 40-year high of 8.6% in May, in the latest report released by the Bureau of Labor Statistics (BLS). The updated figure marked the highest annual rate of consumer inflation since December of 1981.
May inflation came in higher than consensus estimates of 8.3%, surpassing the previous high of 8.5% set in March. Meanwhile, Core CPI, which excludes the volatile prices of food and energy, decelerated slightly to a 6% annual rate, from 6.2% in April. However, the rate exceeded initial projections of 5.9%.
On a month-over-month basis, headline CPI inflation rose 1%, above estimates of 0.7% and accelerating significantly from a 0.3% increase in April. Core CPI also rose at a faster-than-expected rate of 0.6%, compared with estimates of 0.5%.
- In May 2022, CPI inflation rose at an 8.6% annual rate, the highest rate of increase since December of 1981.
- The figure came in above market expectations of 8.3%, and surpassed the previous high of 8.5% set in March.
- Core CPI, which excludes volatile food and energy costs, rose at a 6% annual rate, also exceeding projections of 5.9%.
- Surging costs for energy products, particularly fuel oil and gasoline, were the biggest drivers of inflation. Food prices also increased at their highest annual rate since 1981.
- On a month-over-month basis, headline CPI inflation rose 1.0%, accelerating sharply from a 0.3% increase in April. Core CPI rose 0.6%, also above expectations of 0.5%.
Rising Food and Energy Costs Drive Gains
Gains were driven by a renewed surge in energy costs, with the energy index—measuring gas, oil, and certain utility prices—climbing 3.9% last month after declining in April, and up 34.6% from a year ago, with prices for gasoline up 48.7%. Fuel oil recorded its largest annual increase on record of 106.7%, or 16.9% month-over-month.
Rising food prices also contributed to the acceleration in inflation, with food costs surging 10.1% year-over-year, the highest rate of increase since March 1981. The food index, which includes groceries and dining out, likewise rose 10.1% year-over-year, the first annual increase above 10% since March 1981. Shelter costs, which make up one-third of the CPI, were 5.5% higher.
Impact of Higher Interest Rates
With the Federal Reserve hiking interest rates to fight rising costs, this latest spike in inflation paves the way for the central bank to be more aggressive with its tightening agenda. While this could help reduce inflation, higher interest rates will make it more expensive for consumers to borrow money for homes, cars, and more.
As interest rates rise, and mortgage rates climb in response, Fannie Mae released a survey this week that found a record 79% of respondents think it’s a bad time to buy a home, the highest in the survey’s 12-year history, and a sign that continued inflation could further increase homebuying pessimism. Americans with credit card debt might also end up paying more on their balances, as credit card rates would also increase.
Consumer Sentiment Plunges in June
Meanwhile, the latest release of the University of Michigan’s Consumer Sentiment Index showed consumer confidence falling to a record low in early June. The index reading of 50.2 marked the most pessimistic result since the survey began in 1952, surpassing the previous record low set in early 1980, when inflation hit a postwar high of 14.6%. The economic conditions subindex, which tracks consumers’ near-term prospects for the U.S. economy, likewise set a record low. Forty-six percent of respondents attributed their negative outlook to inflation, the highest share since 1981. Inflation expectations for the year ahead rose further to 5.4%, while the 5-year inflation outlook rose to its highest level since 2008.
Additional reporting by Bill McColl