US inflation runs hot as Federal Reserve eyes interest rate hikes 


US inflation rising at fastest pace for nearly 13 years as Federal Reserve eyes interest rate hikes

Inflation fears spread around the globe after the cost of living in the US soared last month.

Consumer prices across the pond were 5 per cent higher in May than they were a year ago, according to the US Bureau of Labor Statistics – the fastest rate in inflation for nearly 13 years.

There are now deep concerns the US economy is ‘running hot’ and that the US Federal Reserve’s interest rate-setting panel will step in next week.

Warning: Janet Yellen (pictured), the US Treasury Secretary and former chair of the Fed said interest rates may have to rise to stop the US economy overheating

The figures from the world’s largest economy came just days after data from China also showed that inflation was on the rise.

There are now heightened calls for the Fed’s open markets committee to cut back its money-printing programme and hike interest rates. 

This week the Bank of England’s chief economist Andy Haldane warned ‘this is the most dangerous moment for monetary policy since inflation-targeting was introduced into the UK in 1992’.

And the prospect of soaring interest rates will be a hot topic among world leaders at the G7 summit, which begins today.

Robert Alster, chief investment officer at Close Brothers Asset Management, said: ‘Whether calls are heeded, and we see monetary policy levers being pulled, will depend on the next few months of data.’

The Fed had already said it was willing to let inflation run above its 2 per cent target, as it attempts to encourage a strong recovery from the pandemic.

But rising prices will stoke fears that global inflation could climb, pushing up the cost of living in other countries. Danni Hewson, a financial analyst at AJ Bell, said: ‘5 per cent exceeds expectations and the heat will no doubt spark a few uncomfortable conversations. The Fed’s consistently said it is prepared to let things run hot, but how hot is too hot?’

Some economists have remained sanguine. Daniele Antonucci, chief economist at Quintet Private Bank, said: ‘This looks mostly driven by pent-up demand combined with transitory supply bottlenecks as the US economy reopens.’

Rising energy prices have also bumped up inflation. And as manufacturing activity has picked up, the cost of raw materials has jumped. In the UK, inflation hit 1.5 per cent in April, more than doubling from 0.7 per cent in March.

Haldane is worried that inflation could soar unless the Bank of England cuts back its money-printing programme and lifts interest rates.

And Janet Yellen, the US Treasury Secretary and former chairman of the Federal Reserve, said at an event hosted by The Atlantic magazine earlier this month: ‘It may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.’

She has repeatedly said higher inflation will be temporary.



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