US inflation surges to 41-yr high of 8.6%; stocks fall sharply, crude dives

US consumer prices accelerated in May as gasoline prices hit a record high and the cost of food soared, leading to the largest annual increase in nearly 40-1/2 years, suggesting that the Federal Reserve could continue with its 50 basis points interest rate hikes through September to combat inflation.

Oil prices sank along with Wall Street stocks after news about extremely high US consumer prices inflation. At 9.35 pm IST, Brent Crude was trading at $121.03 a barrel, down 1.66 per cent; WTI was at $119.66 a barrel, down 1.52 per cent. 

The S&P 500 was 2.7 per cent lower in morning trading, while moves in the bond market indicated investors' concerns are building about the economy's strength. The Dow Jones Industrial Average was down 772 points, or 2.4 per cent, at 31,500 and the Nasdaq composite was 3.1 per cent lower.

The faster-than-expected increase in inflation last month reported by the Labor Department on Friday also reflected a surge in rents, which increased by the most since 1990. The relentless price pressures are forcing Americans to change their spending habits and will certainly heighten fears of either an outright recession or period of very slow growth.

High inflation also poses a political risk for President Joe Biden and his Democratic Party heading into the mid-term elections in November.

“There’s little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The Fed might still raise policy rates 'just' 50 basis points next week, but it could easily ratchet up the pace beyond then if inflation keeps surprising to the high side.” 

The consumer price index increased 1 per cent last month after gaining 0.3 per cent in April. 

Gasoline prices rebounded 4.1 per cent after falling 6.1 per cent in April.

China's zero Covid-19 policy, which dislocated supply chains, is also seen keeping goods prices strong. It has again imposed new Covid-19 lockdown measures.