U.S. Inflation Rate Hit 6-Year High in May

Increase of 2% in a key price gauge shows the growing economy is on healthier footing

By Harriet Torry of The WSJ. Excerpts:

"the Fed believes a little bit of inflation at a consistent and predictable rate is needed to keep the economy growing steadily and at a healthy pace.

The Commerce Department’s price index for personal-consumption expenditures, excluding food and energy costs, rose 2% in May from a year earlier after running below that mark every month since April 2012."

"Economists have blamed factors like weak economic demand, a strong dollar and a slowly recovering labor market for low inflation in recent years. The strong dollar makes imports cheaper, and soft labor markets hold down wages.

Structural factors are also thought to have played a role, like an aging population spending less, cheap imports due to globalization and the “Amazon effect” of consumers spending less on goods online.

But demand is picking up and unemployment falling. Many forecasters estimate the U.S. economy grew at near 4% or even faster in the second quarter, twice the rate of the 2% average for much of the expansion. More demand tends to push prices higher."

"In recent months, businesses have seen their own costs rise, in part because of high energy prices and labor shortages putting some mild upward pressure on wages. Now, some businesses say they are trying to pass those costs on to consumers."

"For the broader economy, hitting the 2% inflation target is “encouraging,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in an interview. It means the economy is in better balance after slow growth in the wake of the severe 2007-2009 recession. However, “touching 2% isn’t grounds for victory” after the long run of low inflation, Mr. Feroli said. Fed officials “want to see it sustained.”"

See also Analysis: What Will the Fed Do With an Overshoot? Officials now see unemployment dropping to 3.5% by late 2019, a full percentage point below their estimate of where it should be in the long run by Greg Ip of The WSJ. Excerpts:

"we are learning about the real location of the natural rate of unemployment as we go,”" [chairman Powell said]

"Officials’ estimates of the natural rate have dropped in the past two years, but their projection for unemployment by the end of 2019 has dropped even more, and even that may prove pessimistic if the usual relationship between unemployment and economic growth holds"

"The Fed can’t realistically move inflation much this year or next given the lags in monetary policy, but by 2020, it can. It could in theory raise interest rates by enough to slow the economy and cool the labor market so that inflation is 2% instead of 2.1% in 2020."

"For these projections to make sense, Fed officials must either raise their inflation target, assume some serendipitous boost to the economy’s potential growth rate or decline in the natural unemployment rate, abandon their economic models, or run much tighter monetary policy, especially after 2020."