US inflation highest level since the financial crash

US consumer prices rose by 4.2 per cent in April compared to a year ago, the biggest jump in inflation since 2008.

The higher than forecast inflation rate was driven by supply bottlenecks in raw materials such as computer chips and timber as well greater demand for second-hand cars and trucks following the lockdown.

Economists had forecast a jump in prices of around 0.2 per cent but in the event the monthly consumer price index rose by a hefty 0.8 per cent, the biggest monthly increase since 2009. It was also a significant rise on the 2.6 per cent annual increase seen in March.

The US government reported that once more volatile food and energy costs are stripped out of the figures, the consumer price index rose from 1.6 per cent in March to 3 per cent in April year on year, the highest monthly rise for 26 years.

The biggest price rises were for second-hand cars, trucks, logistics, shortage of labour in some areas and raw materials. The shutdown of supply chains around the world because of the pandemic led to shortages of many products, including computer chips which caused delays in manufacturing cars and other goods. Used car prices were up 10 per cent in April.

Another reason given for the sharp rise in prices is that post-lockdown, American families are celebrating coming out of the pandemic by splurging on eating out, holidaying and overall higher spending on consumer goods such as furniture and toys.

As Bloomberg reported last week, US lumber prices have been hitting new peaks on almost a daily basis over recent weeks, up more than four times from a year ago. In turn, the US price hike has pushed up European wood prices.

Behind the huge surge in demand for timber was the pandemic-inspired frenzy by families for doing up their homes as well as increased appetite for larger houses.

However, fears that inflationary pressures will lead to higher interest rates, thus causing problems for President Biden’s gigantic fiscal stimulus plan, were dismissed by Federal Reserve officials.

They claim the increase is temporary, a blip caused by the shortages created by the pandemic which forced countries to close their borders and businesses to shut up shop. Once the global economy recovers, supply constraints should dissipate and prices will settle down with inflation dropping back down to its 2 per cent target level.

Other experts disagree, pointing out that many businesses are still unable to access the materials and products they need and that the cost of labour is also on the rise. They fear that inflation is working its way through the economy, as seen by higher US interest rates over the last few months, and could be here to stay. Most worrying of all, they fear interest rates will have to be jacked up which in turn will throttle the trillion-dollar economic recovery plan unveiled by Biden over the last few weeks.

After a heavy sell off earlier this week, most of the US indexes fell again in early trading. In the UK, the FTSE 100 index bounced back after falling earlier in the week ahead of the figures to climb back over the 7,000 mark.