U.S. labor market recovery gaining steam; inflation heating up

Weekly jobless claims fall 9,000 to 376,000

  
A shopper is seen wearing a mask while shopping at a Walmart store in Bradford, Pennsylvania, U.S. July 20, 2020.

A shopper is seen wearing a mask while shopping at a Walmart store in Bradford, Pennsylvania, U.S. July 20, 2020.

Reuters/Brendan McDermid

WASHINGTON- The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly 15 months, while consumer prices increased solidly in May as the pandemic's easing grip on the economy continues to boost domestic demand.

The recovery from the COVID-19 recession is also being fueled by massive fiscal stimulus and record-low interest rates, straining supply chains. Companies are scrambling for labor and raw materials. Surging prices for used cars and trucks accounted about one-third of the rise in consumer inflation reported by the Labor Department on Thursday. A global semiconductor shortage has undercut motor vehicle production.

The recovering labor market and accelerating inflation will have no impact on monetary policy. Federal Reserve Chair Jerome Powell has repeatedly stated that higher inflation will be transitory.

"The belief remains that these are cyclical pressures that are to be expected when an economy is in the early stages of a strong rebound," said Anu Gaggar, senior global investment analyst for Commonwealth Financial Network. "As the cycle matures, these inflation pressures will subside owing to the structural forces that have kept inflation low for long."

Initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 376,000 for the week ended June 5. That was the lowest since mid-March 2020 when the first wave of COVID-19 infections barreled through the country, leading to closures of nonessential businesses.

Claims have now declined for six straight weeks. Layoffs are abating, with employers competing for labor as millions of unemployed Americans remain at home because of trouble securing child care, generous unemployment benefits and lingering fears of the virus even though vaccines are now widely accessible.

Economists polled by Reuters had forecast 370,000 applications for the latest week.

At least half of the adult U.S. population has been vaccinated against the virus, allowing for broader economic re-engagement. But the pent-up demand has been met with bottlenecks in the supply chain.

In another report on Thursday, the Labor Department said its consumer price index increased 0.6% last month after surging 0.8% in April, which was the largest gain since June 2009. There were also increases in food prices.

In the 12 months through May, the CPI accelerated 5.0%. That was the biggest year-on-year increase since August 2008, and followed a 4.2% rise in April. The jump partly reflected the dropping of last spring's weak readings from the calculation. These so-called base effects are expected to level off in June.

Economists had forecast the CPI rising 0.4% in May and vaulting 4.7% year-on-year.

U.S. stocks were higher. The dollar was steady against a basket of currencies. U.S. Treasury prices fell.

PRESSURES BUILDING

Underlying price pressures are also building up. Excluding the volatile food and energy components, the CPI increased 0.7% after soaring 0.9% in April. The co-called core CPI was driven by a 7.3% rise in used cars and trucks prices, which was on top of a 10.0% jump in April.

The cost of hotel accommodation and car rental also increased. At home, consumers paid more for furniture and bedding and apparel, as well as rents.

The core CPI shot up 3.8% in the 12 months through May, the largest increase since June 1992.

Inflation could also get a boost from employers raising wages as they compete for scarce workers, despite employment being still 7.6 million jobs below its peak in February 2020. There are a record 9.3 million unfilled jobs.

Wages increased a solid 0.5% in May, with hefty gains in the leisure and hospitality sector.

The Fed slashed its benchmark overnight interest rate to near zero last year and is pumping money into the economy through monthly bond purchases. The U.S. central bank has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its 2% target, a flexible average.

The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 3.1% in April, the biggest rise since July 1992.

"We have not yet seen the peak in inflation, but that should occur in the current quarter, though existing pressures should keep the year-over-year pace elevated for the remainder of 2021," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.

"We expect inflation to slow more discernibly over the latter half of 2022, but with inflation expectations continuing to firm, core PCE inflation is expected to remain above 2.0% through our forecast horizon."

Though layoffs are subsiding, initial claims remain well above the 200,000 to 250,000 range that is viewed as consistent with healthy labor market conditions. Claims have, however, dropped from a record 6.149 million in early April 2020.

Further decreases in applications are likely as Republican governors in at least 25 states, including Florida and Texas, are cutting off unemployment programs funded by the federal government for residents starting on Saturday.

These states account for about 40% of the economy. The benefits being terminated early include a weekly $300 unemployment subsidy, which businesses say is discouraging the jobless from seeking work.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci) ((Lucia.Mutikani@thomsonreuters.com; 1 202 898 8315; Reuters Messaging: lucia.mutikani.thomsonreuters.com@reuters.net))

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