Inflation in May reached a new pandemic-era peak of 8.6 percent compared with a year earlier, with soaring energy, housing and food prices driving up costs at the fastest pace in 40 years.
“Whatever Washington has done to try to fix the cost of living crisis in America, it isn’t working,” Chris Rupkey, the chief economist at the research firm FWDBonds, said in an analyst note. “This isn’t just Russia and Ukraine anymore.”
Stocks fell sharply on the unexpectedly high inflation report. The Dow Jones industrial average closed down 880 points, or 2.7 percent. The S&P 500 shed 2.9 percent, and the Nasdaq composite index sank 3.5 percent.
The stunning run-up in gas prices has become one of the most visceral ways people feel inflation in their daily lives. As of Friday morning, the national average for a gallon of gas was $4.99, according to AAA.
Inflation continues to deliver major economic and political consequences in the United States, with companies absorbing rising costs, consumers depleting savings and Democrats fretting about fallout in the upcoming November elections. There were hopes in Washington that inflation might ease this summer, but Russia’s invasion of Ukraine in February pushed energy prices up sharply, and global leaders are scrambling to manage the fallout.
Gas and other energy prices were not the sole drivers of May’s bleak inflation report. Categories for shelter, airfare, used cars and trucks, and new vehicles were among the largest contributors. The cost of medical care, household furnishings and clothing also rose.
The food index increased 10.1 percent for the 12 months ending in May, the first double-digit increase since 1981. Measures for dairy and related products rose 2.9 percent in May, compared with April, their largest monthly increase since July 2007. Meats, poultry, fish and eggs rose 1.1 percent over the month, with the index for eggs rising 5.0 percent.
In Charlotte, rising food and fuel costs have hit Zada Jane’s Corner Cafe. Any menu items with chicken have been marked up $2.50 or $3, general manager Courtney Varnum said. Their own suppliers are slapping fuel surcharges on deliveries and requiring that orders be large enough to make the cost of transportation worthwhile. The only cost that has fallen is labor: The brunch spot employed around 40 workers pre-pandemic but is down to 19.
Varnum said loyal customers so far understand why the restaurant has had to raise prices. But she wonders how long that will last.
“Are people going to keep going out to eat? And gas prices — are people going to keep driving places?” Varnum asked.
The index for airline fares continued to rise, increasing 12.6 percent in May after rising 18.6 percent the previous month. The index for used cars and trucks rose 1.8 percent in May after declining in each of the three prior months.
Rent rose 0.6 percent in May compared with April in the latest sign of a housing market that has become increasingly unequal. Shelter accounts for about one-third of the basket of goods and services used to measure the consumer price index.
Policymakers are especially concerned that if housing costs don’t come down, it will be that much harder for overall inflation to return to more normal levels. Months of tough inflation reports have put pressure on the Biden administration and Federal Reserve to stabilize prices.
“I think 8.3, 8.5, 8.6 percent are all roughly the same number,” said Douglas Holtz-Eakin, former head of the Congressional Budget Office and the president of the conservative American Action Forum. “What we’re looking at is sustained high inflation that we need to control.”
The Biden administration has declared inflation its top economic priority and has taken steps to lower prices at the pump, by tapping the Strategic Petroleum Reserve and allowing blended biofuels to be sold. President Biden has largely blamed the surge on the Russian invasion in Ukraine, dubbing it “Putin’s price hike” that is spilling over into sectors beyond energy and food, namely airfares.
In a statement Friday, Biden called on Congress to pass legislation that would lower costs for energy bills, shipping costs and prescriptions drugs, and warned the oil industry from capitalizing on high gas prices to rake in excessive profits.
“Today’s report underscores why I have made fighting inflation my top economic priority,” the statement read. “Even as we continue our work to defend freedom in Ukraine, we must do more — and quickly — to get prices down here in the United States.”
For everyday drivers, gas prices, in particular, are acting as a kind of billboard for the rising cost of living.
“We’re in uncharted territory,” said Patrick De Haan, head of petroleum analysis at GasBuddy. He added that “it’s not something that’s going to turn around anytime soon, I’m afraid.”
While inflation has weighed on all households, higher prices have dealt a particularly tough blow to lower-income families, many of whom have exhausted safety nets and cushions built up from last year’s stimulus programs.
In Chicago, the number of people served by Lincoln Park Community Services, a homeless shelter, has jumped from 422 individuals last year to 1,400 so far this year, as the cost of groceries, gas and rent has soared. Chief executive Cheryl Hamilton-Hill said food costs at the nonprofit have doubled since last year.
Organization leaders are having to rethink how often they can afford to serve meat and fresh produce. Hamilton-Hill knows that some people in need of food have been visiting grocery stores when they put out samples or go by restaurants after they discard unused food for the day.
She’s seeing the toll of high gas prices, too. Her own employees are stretched to cover their commutes or outreach in the community as the cost per gallon skyrockets.
“This morning when I was driving to work, I think the sign said $8.02,” Hamilton-Hill said.
Most Americans expect inflation to get worse in the next year and are adjusting their spending habits in response to rising prices, according to a poll conducted by The Washington Post and George Mason University’s Schar School of Policy and Government. On Friday, a closely watched consumer sentiment survey from the University of Michigan also showed a jump in people’s inflation expectations over the long term.
That kind of psychological toll is one of the reasons inflation has become a major political threat to Biden and congressional Democrats going into the midterms this year.
Friday’s data also comes amid growing fears of stunted economic growth worldwide. On Tuesday, the World Bank slashed its annual global growth forecast to 2.9 percent, from January’s 4.1 percent, and warned that the global economy may suffer from 1970s-style stagflation, a dangerous combination of weak growth and rising prices. And on Thursday, the European Central Bank announced it will raise interest rates at its July meeting by a quarter of a percentage point in its fight against inflation.
Much depends on whether the Federal Reserve manages to cool down the economy without acting so forcefully that it causes a recession. The Fed is on a path to raising interest rates seven times this year and will enact the third of those hikes next week. It is expected to raise rates by half a percentage point, similar to its May meeting, signaling aggressive moves are needed to keep inflation from becoming more persistent and entrenched in the economy.
“Inflation will come down from this pace on its own,” said Jason Furman, an economics professor at Harvard University who served as an adviser during the Obama administration. “It is just is a question of how much it will come down.”
There are a few encouraging signs in the economy. The red-hot housing market is also starting to cool, as a run-up in mortgage rates discourages aspiring buyers from competing for the few homes available.
There are also limits to what the Fed can do to curb rising prices. Interest rate hikes cannot boost oil supply, bring more people into the labor market or end a war. Energy prices around the world have been rising for months, a reflection of the continuing ripple effects from Russia’s ongoing war in Ukraine.
And though the Fed is in charge of controlling inflation, rising prices have soured Biden’s approval ratings for months and the White House has struggled to convince Americans that the economy is working for them.
At the same time inflation is so high, the labor market is unsustainably hot, with about two job openings for every person looking for work. The Fed’s goal is that higher interest rates can slow down hiring by making it more expensive for businesses to invest and hire.
In an interview with CNBC last week, Fed Vice Chair Lael Brainard made clear the central bank is a long way from seeing progress.
“I’m going to be looking for a consistent string of data on both the strength of demand, the labor market coming into better balance, and of course, importantly, a string of decelerating inflation data to feel more confident,” she said.
Aaron Gregg contributed to this report.