After several years of weak inflation, economists now believe Americans will see higher prices in 2016 and beyond. Weak inflation that fell into near deflation in 2015 has reversed course, with the US consumer price index rising to its highest point since 2013. The CPI for all items rose over 1.1% in April, and has shot up markedly after falling earlier in 2016. Excluding food and energy, the CPI rose over 2.1% in April.
That has led many economists to argue for even greater price increases in the future for goods and services throughout the US economy. The inflation is expected to also be driven by the Federal Reserve, who is now largely expected to increase borrowing costs in June, when it will decide on interest rate targets for short-term US Treasuries, Economy Watch reported.
The Labor Department said its CPI increased 0.4% last month, the largest gain since February 2013, after rising 0.1% in March.
Many large investment firms are encouraging clients to prepare for greater inflation, and economists are adding to those warnings by noting that many indicators of aggregate demand, such as retail sales growth, indicate higher prices are around the corner.
Blackrock, the world’s largest bond investment firm, released a report noting that higher inflation is being driven by increased costs for manufacturers. "Our analysis suggests rising US inflation pressures will persist, as factory-gate price increases are passed on to consumers,” the company said in a report, adding that a variety of factors are causing prices to rise.
"It is not just the rebound in energy prices pushing inflation higher. An appreciating US dollar is abating as a headwind. Prices of more stable service-based components of the CPI are also rising,” the report added.
Living Costs Higher
While this will make living costs higher for Americans, Blackrock also believes that salaries are set to rise. "Wages, too, are moderately increasing, as are survey-based consumer inflation expectations,” the firm noted. Blackrock also believes this will drive the Fed to increase rates in the next few months.
Blackrock was also joined by two other investment firms, both banks, who sent notes to clients urging them to hedge against inflation as rising interest rates and a renewed American economy will drive prices up.
Markets have increasingly priced in an interest rate hike in June, with short-term treasury yields rising on Monday and futures markets indicating more rises to come. Federal Reserve Chairwoman Janet Yellen will speak on Friday, and she is widely expected to give the market another hint that rates are going to rise sooner rather than later.
Confidence Sets In
Other data on Tuesday showed housing starts rose more than expected last month, with builders ramping up the construction of single and multi-family homes, suggesting the economy was regaining steam early in the second quarter.
The report from the Commerce Department, which also showed a surge in new home prices to a record high, offered further evidence of a pick-up in economic growth that could allow the Federal Reserve to raise interest rates soon, Reuters reported.
"Consumers are taking the leap and buying the biggest of big ticket items of their lives and this speaks to confidence. The Federal Reserve can raise rates at their June meeting without fear the economy is going to slow," said Chris Rupkey, chief economist at MUFG Union Bank in New York.
New home sales jumped 16.6% to a seasonally adjusted annual rate of 619,000 units, the highest level since January 2008. The percent increase was the largest since January 1992.
Americans also paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming.
The Fed has a 2% inflation target and tracks an inflation measure which is currently at 1.6%.
