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The Bureau of Labor Statistics revealed that annual inflation in May stood at 8.6%, marking the highest annual price increase since December 1981. May’s figure once again sets a new inflation record not seen in 4 decades.
During the month of May, the price index grew by 1%, after having grown by 0.3% during April. The price index — which measures the change in the cost of living — has risen precipitously since the beginning of 2021 when the economy began to recover from the Covid-19 crisis.
Increases in the cost of food, rent, and gas were the biggest contributors to the price increase in May.
Goods and services most affected by inflation
Food prices rose by 1.2% in May; over the last twelve months, food has become 10.1% more expensive. Eating at home no longer seems to be a way to save, as the price of food in supermarkets has risen 11.9% in twelve months—the highest annual increase in the cost of food since 1979.
The index that measures the cost of protein — meat, pork, fish, and eggs — led the food price increase with a 14.2% increase in one year. The price of eggs rose more than 32.2% according to the BLS, making it the most expensive food item in the last twelve months.
The cost of energy rose 3.9% after falling 2.7% in April. The index tracking gas prices rose 4.1% in May after a slight drop in April. The Russo-Ukrainian war also continues to pressure oil prices around the world, ultimately impacting fuel costs. The average price per gallon in the U.S. is around $4.97.
Energy has risen 34.6% in the last twelve months. Although the rise in the cost of energy has been coming since 2021, the situation in Ukraine has made the supply of gas, coal, and oil more limited across the globe, which ends up impacting domestic prices.
The core inflation index, which excludes the cost of more volatile goods such as food and fuel, rose 0.6% during May. Excluding the cost of food and energy, inflation in the U.S. has been 6%, three times above the Federal Reserve’s (FED) inflation target of 2%.
Printing money and increasing government spending: the formula for more inflation
An unprecedented increase in government spending, coupled with the largest monetary expansion in history, to stimulate the economy out of the COVID crisis, served to grow the economy momentarily, but also to overstimulate consumption.
Americans flushed with savings and extra money from the government and a private sector eager to recover lost sales during government-mandated lockdowns was the perfect formula to unleash a wave of inflation.
The sense of immediacy of e-commerce has also exacerbated the situation, with one click Americans can buy a product and have it on their doorstep in a few days. However, the logistical challenge of getting millions of packages to different addresses across the United States is titanic.
Supply chains around the world, hit by shutdowns and loss of workers, were unprepared for the surge in demand that came. Today, the U.S. hires more truck drivers and warehouse workers than it did in February 2020, yet Americans see some of the products they consume no longer on the shelves.
FED’s dilemma
In May, the FED raised interest rates by half a point to control inflation, however, the vigorous rise in prices during the month of April may force the central bank to consider raising interest rates next.
A rise in interest rates makes the cost of credit more expensive, thus discouraging demand, and prices may begin to rise at a slower pace. The downside of rising interest rates is that it could impact the growth of an economy that has become accustomed to having plenty of liquidity, so a decrease in the circulation of money could push the U.S. into a recession.
The FED faces the difficult task of tightening monetary policy enough to cool the overstimulated economy and calm inflation, while preventing the U.S. from falling into a recession.
In the first quarter of 2022, the U.S. economy recorded a 1.4% decline, adding to pressures on the central bank to maintain a difficult balance between controlling inflation and stimulating economic growth.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica