A surge in prices in May delivered a blow to President Joe Biden and underscored the immense challenge facing the Federal Reserve as inflation, which many economists had expected to show signs of cooling, instead re-accelerated to climb at its fastest pace since late 1981.

Consumer prices rose 8.6% from a year earlier and 1% from April — a monthly increase that was more rapid than economists had predicted and about triple the previous pace. The pickup partly reflected surging gas costs, but even with volatile food and fuel prices stripped out the climb was 0.6%, a brisk monthly rate that matched April’s reading.

Friday’s consumer price index report offered more reason for worry than comfort for Fed officials, who are watching for signs that inflation is cooling on a monthly basis as they try to guide price increases back down to their goal. A broad array of products and services, including rents, gas, used cars and food, are becoming sharply more expensive, making this bout of inflation painful for consumers and suggesting that it might have staying power.

More

The quick pace of inflation increases the odds that the Fed, which is already trying to cool the economy by raising borrowing costs, will have to move more aggressively and inflict some pain to temper consumer and business demand. The central bank is widely expected to raise rates half a percentage point at its meeting next week and again in July. But Friday’s data prompted a number of economists to pencil in another big rate increase in September. A more active Fed would increase the chances of a marked pullback in growth or even a recession.

“It suggests that the Fed has more to do to bring down inflation,” Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, said of the inflation data. “It was strong across the board, not concentrated, and higher than our expectation.”

Advertising

Markets, nervous about the Fed’s policy path and the rising risk of a downturn, tumbled after the Labor Department released the report. The S&P 500 fell 2.9%. Yields on short-term government bonds, which serve as bench marks for borrowing costs, rose sharply, with the rate on the two-year Treasury note hitting 3.06%, its highest level since 2008.

Economists warn that wrestling inflation lower could be a slow and painful process. Production and shipping snarls tied to the pandemic have shown early signs of easing but remain pronounced, keeping products like cars and trucks in short supply. The war in Ukraine is elevating food and fuel prices, and its trajectory is unpredictable. And consumer demand remains strong, buoyed by savings amassed during the pandemic and wages that are rising robustly, albeit not enough to fully offset inflation.

“Inflation remains unrelenting — consumers continue to get hit from all sides,” said Sarah Watt House, a senior economist at Wells Fargo. “There is very little inflation relief in sight.”

In a statement after the release, Biden said the numbers underlined why inflation is a top priority of his, while emphasizing that prices are increasing around the world.

But controlling inflation is primarily the Fed’s job, and Friday’s numbers increased speculation that the Fed might raise rates by 0.75 percentage points in the months ahead — even though important Fed policymakers have shown little appetite for such a drastic move.

“We think the U.S. central bank now has good reason to surprise markets by hiking more aggressively than expected in June,” economists at Barclays wrote after the release.

Advertising

The chorus of speculation illustrated just how grim the consumer price news was, especially paired with evidence that inflation expectations are increasing. A measure of where households expect prices to be five years from now hit its highest reading since 2008 in preliminary data released Friday.

Fed officials are likely to carefully parse Friday’s report for hints at what might come next. Costs for pre-owned vehicles, which economists had been expecting to moderate or even decline, instead rose sharply and were up 16.1% from a year earlier. New car prices were up 12.6%.

The jump was also driven by pandemic-affected industries like travel. People have been taking vacations with a vengeance after years stuck at home, and airfares were up 37.8% from a year earlier. Hotel stays cost 22.2% more than last May.

Rents are still rising sharply, and a rent-tied measure of housing costs for people who own their homes accelerated. Housing indexes make up about one-third of overall inflation and generally move slowly, so they could put continued pressure on inflation in the months ahead.

In fact, a recent jump in rents on new leases tracked by private data providers means housing costs will probably continue to climb for some time, as renters renew or move and face higher market costs. There is also a risk that higher mortgage rates will prevent people from buying homes, keeping a squeeze on apartment supply.

“The rental market feels very tight: Vacancies are very low, and because of that rents are raising at a strong clip,” said Igor Popov, chief economist at Apartment List.

Advertising

Overall, the report was a discouraging one for policymakers, and it highlighted that they have their work cut out for them as consumer and business demand remains strong. While the White House has been instituting policies that might help families with inflation around the edges by improving supply or offsetting costs — like trying to clear up port backlogs, or releasing strategic petroleum reserves to mute gas price increases — the task of cooling down consumption falls almost entirely to the central bank.

So far, spending shows little sign of cracking. Even as vacation costs jump off the charts, for instance, travelers continue to book trips.

“The resilience of travel is really remarkable,” Anthony G. Capuano, CEO of Marriott International, said during a Tuesday event with analysts, later adding that the hotel company is seeing “extraordinary pricing power.”