US inflation surpasses expectations by reaching 5.4%

Economists had initially forecast that the rate of inflation would be 4.9%

The rate inflation rose again last month, going against the Federal Reserve‘s notion that recent high levels of inflation are ‘transitory’.

In June, the consumer price index increased by 5.4% year-on-year, the quickest rate since August 2008, and well above the 5% figure from.

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Economists had initially forecast that the rate of inflation would be 4.9%.

It is still early to determine whether the recent uptick in US inflation is transitory or structural, according to Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson. However, core CPI inflation (ex-food and energy) has trended up to its highest level in 30 years and increases the risk that inflation could be structurally higher in future.

“Breaking down the data, just three categories (shelter, used car prices and transportation services) accounted for 76% of the annual increase in core CPI for June. The sharp price gains for used cars and transportation services (e.g. airfares) are driven by supply issues and should be resolved once output picks up after economic reopening,” said Casali.

“However, the shelter CPI component (including rents) accelerated to 2.6% year-on-year, its highest level for a year, from 2.2% in May. Accelerating shelter prices is more of a concern given that it accounts for 42% of core CPI inflation basket and it can move higher from here. That’s because landlords may view the opening-up of the economy as an opportunity to raise rental prices and could include a premium as insurance against potential future eviction moratoriums by the government in the event of rising Covid cases.”

For a while now, the Federal Reserve has described the price rises as ‘transitory’, sending the message that inflation will settle as lockdowns ease and supply balances out with pent-up levels of demand.

However, a number of investors are concerned that inflation could be here to stay well beyond the Fed’s expectations.

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