Consumer prices increased quickly in May, in the latest sign that inflation is finally rising to normal levels after three years of disinflation and efforts by the Federal Reserve to ease the money supply and expand credit to reverse the trend.
The Consumer Price Index rose to 2.1 percent for the year ending in May, the Bureau of Labor Statistics reported Tuesday morning. Prices increased 0.4 percent during the month, adjusting for seasonal variation, twice as fast as analysts expected.
While the increase in prices was led by the rising costs of food, electricity and gasoline, the gains were broad-based. Core inflation, a less volatile index of price changes that strips out food and energy costs, was up 1.8 percent for the year. The 0.3 percent increase of seasonally adjusted core prices in May was the largest since August 2011.
Chairwoman Janet Yellen and other members of the central bank, set to meet in Washington Tuesday and Wednesday to set monetary policy, are not likely to overreact to headline inflation slightly over the Fed's 2 percent target. They use another gauge, core inflation as measured by the the Personal Consumption Expenditures index, as their guiding metric. Inflation remains relatively muted by that standard, still just at 1.4 percent in the most recent update.
But the continued rise of headline and core inflation in the CPI adds to a growing body of evidence that inflation is moving back up toward the Fed's target. "Core inflation shows a clear pick-up," noted High Frequency Economics' Jim O'Sullivan, adding that the news "will clearly discourage Fed officials from making their forward guidance any more dovish than it is already."
And Tuesday's increase in reported inflation mirrors increases in other indices. All main measures of inflation have been moving upward in recent months, although prices received by producers did post a slight decline in May:
The flip side of rising inflation in May, however, was a loss in purchasing power for workers. The BLS reported that workers' hourly earnings rose by 0.2 for the month. Given the 0.4 increase in prices, that meant that their real earnings fell by 0.2 percent. Earnings have fallen by 0.1 percent over the last year.