US consumer prices post largest gain in nearly 12 years in April

U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints, which could add fuel to financial market fears of a lengthy period of higher inflation.

The report from the Labor Department on Wednesday also showed a strong building up of underlying price pressures, extending a selloff on Wall Street. Most economists were, however, unwavering in their belief that the surge in prices would be temporary, with bottlenecks in the supply chain expected to ease. Federal Reserve Chair Jerome Powell shares similar views.

“This is not a sign of an inflation problem,” said Robert Barbera, director of Johns Hopkins University’s Center for Financial Economics. “We have the capacity to produce this stuff, we simply need time to get things back on line.”

The consumer price index jumped 0.8% last month, the largest gain since June 2009. The CPI rose 0.6% in March. A record 10.0% surge in prices of used cars and trucks accounted for over a third of the increase in the CPI last month. That followed a 0.5% rise in March. Motor vehicle production has been hampered by a global semiconductor shortage, boosting demand for used automobiles.

Food prices increased 0.4%, lifted by solid gains in the costs of fruits and vegetables, dairy products, meats, fish and eggs. It also cost more to dine out. But gasoline prices fell 1.4% after accelerating 9.1% in March.

A sharp rebound is likely after hackers shut down Colonial Pipeline, leaving gas stations from Florida to Virginia running dry and prices at the pump surging this week.

Economists polled by Reuters had forecast the CPI climbing 0.2% in April. In the 12 months through April, the CPI shot up 4.2%. That was the largest gain since September 2008 and followed a 2.6% increase in March. The jump mostly reflected the dropping of last spring’s weak readings from the calculation.

Those so-called base effects are expected to push annual inflation even higher in the months ahead.

Stocks on Wall Street opened lower, building on the previous session’s losses, as investors worried surging inflation could force the Fed to raise interest rates sooner than expected. The dollar strengthened against a basket of currencies. U.S. Treasury prices were lower.

PRICES PRESSURES RISING

The Fed slashed its benchmark overnight interest rate to near zero and is pumping money into the economy through monthly bond purchases. The U.S. central bank has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its 2% target, a flexible average.

The Fed’s preferred inflation measure, the core personal consumption expenditures price index is at 1.8%.

Demand is being driven by nearly $6 trillion in government relief since the COVID-19 pandemic started in the United States in March 2020 and the vaccination of more than a third of the population. There are concerns inflation could linger amid reports that companies are raising wages as they compete for scarce workers.

Though job openings are at a record 8.1 million and nearly 10 million people are officially unemployed, companies are scrambling for labor. Generous unemployment benefits, fears of contracting COVID-19, parents still at home caring for children and pandemic-related retirements have been blamed for the disconnect. Average hourly earnings jumped in April.

Economists are keeping an eye on fairly high inflation expectations, which some say could become a self-fulfilling prophecy.

“Consumers see prices of everything from computer chips to chicken wings jumping,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “In addition to the massive stimulus worth a few trillion dollars so far, there will be many more trillions of dollars of additional spending to come adding to inflationary pressure.”

Excluding the volatile food and energy components, the CPI soared 0.9%, the largest gain since April 1982. The so-called core CPI rose 0.3% in March. It was boosted by a 10.2% surge in the prices of airline tickets as well as an 8.8% jump in the costs of rooms in hotels and motels.

Prices for new motor vehicles increased a solid 0.5%. Consumers also paid more for recreation, motor vehicle insurance and household furnishings. But healthcare costs edged up 0.1% for a second straight month.

In the 12 months through April, the core CPI jumped 3.0%. That was the biggest increase since January 1996 and followed a 1.6% advance in March.