US headline CPI increased 5% in May compared to May 2020 and 0.6% compared to April 2021. Core inflation, which takes out food and energy, rose 3.8% from a year earlier and 0.7% from the previous month. See our CPI dashboard of charts at Dashboard | Capitalightresearch.
Comparing the increase to May 2019, in order to take out the base effect (the decline in 2020 due to the pandemic-induced lockdowns) headline CPI rose 5.1%, which equates to a rate of about 2.5% per year. This is well above the average over the last 10 years of 1.79%.
Not surprising the increase is driven by sectors most affected by reopening, such as travel where airline fares increased by 7.0% over April 2021 and more than 24% from a year ago. The combination of the lifting of pandemic restrictions and consumers flush with cash partly dye to government stimulus has increased consumer spending on merchandise where retails are reporting inventory shortages due to backlogs. The lifting of restrictions has also increased the demand for services as more consumers are socializing and traveling more.
The question for financial markets is whether the Fed will continue to view the increases in CPI as temporary (also called transitory) or if the the Fed will start to view part of the increases as permanent, leading to an interest rate increase sooner than currently expected. Our view is that the Fed will continue to chalk the increases in CPI up to temporary factors for the time being.