Inflation jumps at fastest rate since 2008 as coronavirus rebound spurs demand

Consumer prices rose at the fastest rate in more than a decade as the recovering U.S. economy pushes inflation higher, according to data released Wednesday by the Labor Department

The consumer price index (CPI), a closely watched gauge of inflation, rose 0.8 percent in April and 4.2 percent in the year leading into last month, rising at the fastest annual rate since a 4.9 percent jump in September 2008. The CPI minus food and energy prices, which are more volatile, rose 0.9 percent in April for the largest monthly increase since 1982.

Most of April’s price increases were driven by areas of the economy hit hard by the coronavirus recession adjusting to a surge of new demand.

Prices for used cars and trucks soared 10 percent in April, the largest one-month increase since the Labor Department began tracking it in 1953, driving roughly a third of all April price increases. Used cars and trucks have been in high demand as rental car companies attempt to rebuild fleets they sold off during the onset of the pandemic and repossessions decline.

The Labor Department said that increases in prices for shelter, airfares, recreation, motor vehicle insurance and household goods and services — all of which had collapsed last year — were also major drivers of April’s price increases.

Inflation was widely expected to keep rising as prices recovered to and slightly exceeded their pandemic lows with the U.S. economy kicking back into gear. Measurements of inflation are not only influenced by the sharp jump from prices pushed lower by the pandemic, but supply shortages driven by the slow thaw from the pandemic abroad.

But the April increases in inflation were larger than some analysts expected, causing stock futures to sink after the release of the data.

Federal Reserve Vice Chairman Richard Clarida said he was “surprised” by the April jump during a question-and-answer session following a speech to the National Association of Business Economists, saying that it would take time for the U.S to catch up to rising demand.

Clarida said during his speech that inflation would likely move above the Fed’s long-term goal of a 2 percent annual increase this year, but would “likely to have only transitory effects on underlying inflation.”

Many economists, like Clarida, are confident that inflation will even out as suppliers catch up to increasing demand and progress containing COVID-19 allows the U.S. economy to recalibrate after an unprecedented shock.

“In the coming months, ongoing base effects, price increases stemming from the reopening of the economy and some pass-through of higher prices from supply chain bottlenecks should prompt higher inflation,” wrote Kathy Bostjanic and Gregory Daco of Oxford Economics in a Wednesday analysis.

“However, we believe part of the acceleration in inflation will be transitory, and we share the Fed’s view that this isn’t the start of an upward inflationary spiral.”

Biden administration economic officials and Federal Reserve leaders have expressed confidence that rising inflation will settle down within months. Fed Chairman Jerome Powell and other bank officials have also argued that inflation is unlikely to start rising at an unsustainable level after decades of downward pressure on prices that has pushed inflation below the Fed’s target.

But rising inflation will still pose political challenges for both President Biden and the Fed as they attempt to defend their efforts to keep support flowing into the economy.

Republican lawmakers have locked arms in opposition to Biden’s multitrillion-dollar infrastructure proposals, arguing that another raft of federal spending will push inflation to unsustainable levels. GOP lawmakers and inflation hawks have also raised concerns about the Fed’s insistence on keeping interest rates near zero percent through the end of 2021 and lack of clarity as to when it will pare down its monthly purchases of mortgage and Treasury bonds.

Updated at 9:50 a.m.