A shock jump in US inflation to its highest level in 13 years stoked fears of price pressures boiling over, turning up the heat on the Federal Reserve’s rate-setters.
Fears of the world’s biggest economy overheating were fuelled by the consumer price index (CPI) unexpectedly jumping from 5pc to 5.4pc in June – the largest rise since 2008.
Forecasters had expected the cost of living gauge to cool slightly to 4.9pc but price pressures continued to build, casting more doubt on the Fed’s view that high inflation will be temporary.
Prices rose 0.9pc compared to May, while core CPI – which strips out more volatile food and energy costs – leapt to 4.5pc year-on-year, the highest since 1991.
Big rises in prices for travel, including air fares, and used cars all boosted inflation.
The figures will add to the fierce debate dividing economists over whether post-Covid inflation will be temporary or become more entrenched and dangerous.
Ambrose Crofton, global market strategist at JP Morgan Asset Management, said: “Many of the price increases in areas most affected by the reopening are likely to temper in the coming months. But some components of today’s report raise the prospect that underlying inflationary pressures are set to linger longer than most expected.”
Inflation is being stoked by supply chain constraints and a jolt to demand caused by a reopening economy and government stimulus. The Fed slashed interest rates to near zero in response to the pandemic last year but some fear policymakers will need to hike borrowing costs early to rein in inflation.
James Knightley, an ING economist, said the latest jump in inflation “heaps pressure on the Fed” and made a stronger case for a 2022 rate rise.
“Yet another blowout inflation reading makes it increasingly difficult for the Fed to stick to its position that elevated inflation readings are merely ‘transitory’,” he said. “Pipeline cost pressures continue to build and corporates are looking to pass them onto customers in an environment of such robust demand.”
Alexander Lin, a Bank of America economist, said “transitory price pressures remain rampant” but argued the figures did not yet signal trouble.
The market’s worries over inflation have eased in recent weeks but the dollar and Treasury yields moved higher following the surprise figures as rate hike bets rose. The pound fell as much as 0.6pc versus the dollar to $1.38 while the benchmark 10-year Treasury yield edged up to a high of 1.38pc before retreating again.
Larry Summers, the former US Treasury Secretary, warned earlier this week that markets could be underestimating the risk of inflation: “At times when inflation has significantly accelerated in the past, such as in the 1960s, markets have lagged rather than anticipated developments.”