WASHINGTON - Soaring energy prices punished ordinary Americans in May, triggering the highest run-up in inflation in six months and exceeding the expectations of economic forecasters, the government reported yesterday.
Consumer prices rose 0.6 percent, as measured by the Labor Department's Consumer-Price Index. Prices have risen by 4.2 percent, slightly above the 4.1 percent rise in prices for last year.
Those annual numbers reflect the rise in all prices across the economy, and don't necessarily capture the pain that many Americans are feeling at the cash register. Food prices have risen 5 percent since May last year - more for some staples such as eggs, up 18.2 percent; white bread, up 15.6 percent; and fresh whole milk, up 10.5 percent.
In addition, the overall inflation number is being dragged down by falling prices for homes and rentals.
Yesterday's inflation report underscores the dilemma that the Federal Reserve faces. To spark economic activity by lowering short-term interest rates, it has aggressively slashed its benchmark lending rate to 2 percent from 5.25 percent since August. But that risks inflaming inflation.
Even the "core" inflation rate - which strips out volatile food and energy prices to measure the more stable broad price level - remains elevated beyond the Fed's comfort zone of a 2 percent annual rate. Still, it rose only 0.2 percent in May and only 2.3 percent since May last year.
Normally, that would call for the Fed to raise interest rates to slow economic activity in a bid to quash inflation, but that could tip the economy into recession, or, if it's already in one, make it worse.
However, while yesterday's report from the Bureau of Labor Statistics meant more bad news for consumers, the relatively stable core inflation rate brought some comfort for the Fed. That suggests that high energy prices are not yet excessively feeding into the cost of manufactured goods. It means that, while stubborn, this measure of inflation is not yet turning into a gallop.
"While core CPI rose at an elevated pace relative to the Fed's longer-run objective, the large energy cost increases did not translate into notable generalized price pressure in the month, providing market relief," Peter Kretzmer, a New York economist with Bank of America, wrote in a research note to investors. "Still, elevated core inflation and persistently high headline inflation will not generate any relief at the Fed."
Most economists believe that the Fed will be forced to raise interest rates this year, but probably not before autumn. Yesterday's data suggest that the Fed probably won't do so when its rate-setting Federal Open Market Committee meets June 24 and 25.
Still, the latest inflation report means the Fed must act against inflation eventually.
"Although core price inflation remained moderate, there will be concern in Fed quarters that the May uptick in the core rate is a harbinger of the pass-through of surging energy costs into consumer prices at large," said Kenneth Beauchemin, an economist with forecaster Global Insight in Lexington, Mass. "The May upturn in airline fares [3.2 percent] serves as an early warning and could be just one of many dominoes to tumble."