The breakneck pace of US consumer price increases seen since the start of the year accelerated in June, challenging the Federal Reserve’s case that the burst of inflationary pressures accompanying the economic reopening will prove temporary.

The consumer price index rose 5.4 per cent in June from a year ago — above the nearly 13-year high of 5 per cent reported in May and surpassing the 4.9 per cent increase forecast by economists.

On a monthly basis, data released by the Bureau of Labor Statistics showed price gains of 0.9 per cent, well above the 0.6 per cent seen in May.

Stripping out volatile items like food and energy, “core” CPI rose from 3.8 per cent in May relative to the year before to 4.5 per cent in June.

Investors, economists and policymakers have scrutinised incoming inflation figures amid a fierce debate about the risk of runaway consumer prices fuelled by ultra-accommodative fiscal and monetary policy.

Price jumps have so far been most significant for sectors directly affected by the coronavirus pandemic. Travel-related expenses, such as airfares, have soared, while a semiconductor shortage has contributed to a jump in used car prices. 

The US central bank has long characterised elevated inflation prints as “transitory”, fading as Covid-19 lockdowns ease further and supply catches up with pent-up demand. 

Market measures of inflation expectations align with this view, with long-dated metrics running below their short-term counterparts. The 10-year break-even rate, one popular gauge, has dropped from its recent high to settle at about 2.3 per cent, while the two-year rate has edged lower from its May peak to hover below 2.7 per cent.

Plummeting Treasury yields also reflect ebbing concerns about an inflationary overshoot beyond the Fed’s 2 per cent target — a move that was driven in part by the prospect the central bank may tighten policy sooner and more aggressively than initially expected. 

Yields shot up in the first quarter of the year as Wall Street ditched US government bonds in droves, anticipating that higher consumer prices would erode the value of the fixed payments they provide. Since June they have fallen dramatically, but following Tuesday’s release, the benchmark 10-year bond traded higher at 1.37 per cent.

That is still well below its recent peak in March, at nearly 1.8 per cent.

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