Inflation Is Rising, and the Stakes Are High

A new government report confirms what many Americans probably already noticed: Prices are rising for all kinds of things. The Labor Department said Thursday that inflation rose 5% in May when compared to the previous year, which is higher than expected and the biggest spike since the summer of 2008—just before the US plunged into the Great Recession, reports CNBC. The big question is whether it's a pandemic-related blip, and the economic stakes are high if not. Coverage:

• Big factor: What economists call the "base effect" is at play here, notes the Wall Street Journal. Last year, prices were depressed more than usual because of pandemic shutdowns, and this year's figure looks big in comparison.

• The auto factor: Part of the inflation spike is chalked up to the surging prices of new, used, and rental vehicles. The cost of used vehicles, for instance, jumped 7.3% in May from April, per CNN. A semiconductor shortage (used in vehicles' computers), as well as pent-up demand from people who want to get out and travel, are factors. Elsewhere, a lumber shortage is driving up new-home prices.
• The stakes: That inflation rose more than expected is worrisome to investors because it suggests that more than just "technical reasons" are at play, notes the New York Times. The concern: "Inflation can erode purchasing power if wages do not keep up," per the story. " A short-lived burst would be unlikely to cause lasting damage, but an entrenched one could force the Fed to cut its support for the economy, potentially tanking stocks and risking a fresh recession."
• The question: For now, investors seem confident that the Fed won't take drastic action. In fact, the Dow was up 200 points in early trading Thursday. But that could change if inflation doesn't start to diminish. "The price spikes could be bigger and more prolonged because the pandemic has been so disruptive to supply chains," Mark Zandi of Moody's Analytics tells the AP. But "by the fall or end of the year, prices will be coming back to earth," he predicted. Julia Coronado of MacroPolicy Perspectives puts it this way to the Times: "We are at peak heat, this is the moment. We know we'll get a fade—the question is, how big is the fade?"

(More economy stories.)