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Deutsche Bank report issues 'dire' warning for US economy: Core inflation soars to 29-year HIGH of five per cent akin to 'war-time' footing as Republicans say it will be 'devastating for poorest families'

 Deutsche Bank has issued a stark warning on inflation, after consumer prices in the U.S. rose at a faster rate in May than any time since the Great Recession.

In its report Thursday, the government said that overall consumer prices rose 0.6 percent in May, bringing the annual inflation rate to 5 percent, the highest level since August 2008. 

Core inflation, which excludes volatile energy and food costs, rose 0.7 percent in May after an even bigger jump in April, and is up 3.8 over the past 12 months, the quickest rate since 1992.

In a report on this week, Deutsche Bank wrote: 'Rising prices will touch everyone. The effects could be devastating, particularly for the most vulnerable in society.'

'Few still remember how our societies and economies were threatened by high inflation 50 years ago. The most basic laws of economics, the ones that have stood the test of time over a millennium, have not been suspended,' the report warned.

The report expressed concerns that huge deficit spending by Congress as well as the Federal Reserve's loose monetary policy could supercharge inflation rates.

'The current fiscal stimulus is more comparable with that seen around WWII' when deficits ran 15 to 30 percent of GDP for four years, the report said. 'While there are many significant differences between the pandemic and WWII we would note that annual inflation was 8.4%, 14.6% and 7.7% in 1946, 1947 and 1948 after the economy normalized and pent-up demand was released.'

'Monetary stimulus has been equally breath-taking,' the report added of the Federal Reserve, which has flooded the economy with money through bond purchases. 

'In numerical terms, the Fed's balance sheet has almost doubled during the pandemic to nearly $8 trillion. That compares with the 2008 crisis when it only increased by a little more than $1 trillion, and then increased another $2 trillion in the subsequent six years.' 

'We worry that inflation will make a comeback,' the report concluded. 'An explosive growth in debt financed largely by central banks is likely to lead to higher inflation.' 

Republicans also blame the sharp rise in inflation on lax monetary policy and freewheeling stimulus spending by the Biden administration, which has proposed a record $6 trillion federal budget for the next fiscal year. 

Inflation in the U.S. rose at a faster rate in May than any time since the Great Recession, data on Thursday showed

Inflation in the U.S. rose at a faster rate in May than any time since the Great Recession, data on Thursday showed

People walk through a shopping area in Manhattan on Monday. The reopening surge is driving prices higher for consumers

People walk through a shopping area in Manhattan on Monday. The reopening surge is driving prices higher for consumers

Republicans blame President Joe Biden's free spending policies, including his record proposal for a $6 trillion federal budget

Republicans blame President Joe Biden's free spending policies, including his record proposal for a $6 trillion federal budget

US inflation rates last peaked in the 1970s, as food and gas prices soared in the OPEC oil embargo

US inflation rates last peaked in the 1970s, as food and gas prices soared in the OPEC oil embargo

'President Biden's inflation crisis is here and it's devastating for our poorest families,' Senator Rick Scott, a Florida Republican, said in response to the new data. 

'It's time to end the madness. It's clear we cannot rely on Joe Biden and the Democrats to stand up and protect American families,' said Scott, who is pushing a bill to slash government spending and rein in federal debt. 

'Inflation is up 5%—and Biden wants to spend $6 trillion more to see how high it will go,' tweeted Senator Tom Cotton, an Arkansas Republican.  

Though the new inflation measure exceeded economists' forecasts, Fed Chair Jerome Powell has repeatedly insisted that higher inflation will be transitory, and it was unclear whether the new data would prompt a reassessment of monetary policy to meet its 2 percent average inflation goal.

The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and continues to flood the economy with money through monthly bond purchases. 

Senator Pat Toomey, a Republican from Pennsylvania and economy-focused moderate, argued that the Fed needs to immediately adjust course and raise interest rates before inflation spirals out of control. 

'With consumer prices up 5% over the last year, and core prices (excluding volatile food and energy) up 3.8%—a 29-year high!—we should all be very concerned. It's long overdue for the Fed to begin the process of normalizing its monetary policy,' Toomey tweeted.

'The combination of the Fed's average inflation targeting and its view that inflation will be transitory virtually guarantees the Fed will be behind the curve if inflation is enduring. Congress' massive spending contributes to the problem. It's time to end it,' he added. 

Senator Bill Hagerty, a Tennessee Republican who sits on the Banking Committee, called the spike in inflation 'a clear and immediate tax on the middle class.'  

'President Joe Biden's partisan trillion-dollar spending sprees are raising prices on groceries and gas and everything in between,' he said in a statement. 'Unless our supply chains normalize quickly to meet pent-up demand from the pandemic, this tax hike on the American people will continue and could go even higher.' 

Some Republicans, including Scott, raised the specter of a return to the inflation rates of the 1970s, when annual inflation jumped as high as 13.5 percent as food and gas prices soared.

Democrats, meanwhile, remained largely silent on the new inflation data, or insisted that it was a transitory effect driven largely by such factors as a shortage of used cars, saying it will quickly disappear. 

The Fed views a controlled amount of inflation as good, because it encourages spending and business investment, rather than hoarding cash. 

But out-of-control inflation can be dangerous, eroding the spending power of consumers and hitting low-income families and elderly pensioners the hardest.

Other factors driving inflation include rising consumer demand post-pandemic that is bumping up against a shortage of components, from lumber and steel to chemicals and semiconductors, that supply such key products as autos and computer equipment, all of which has forced up prices. 

The sharp rise in consumer prices reflected a range of goods and services now in growing demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly reopening economy. 

And as consumers increasingly venture away from home, demand has spread from manufactured goods to services - airline fares, for example, along with restaurant meals and hotel prices - raising inflation in those areas, too.


A labor shortage has also contributed to rising prices, as companies continue to offer high wages and incentives to lure reluctant workers back into the job market. 

More than 15.3 million Americans are still on some form of unemployment benefit, data on Thursday showed, yet employers are struggling to attract qualified workers back into jobs, and about eight million fewer people are working than before the pandemic began.

From breakfast cereal to toilet paper: These are the companies raising prices on everyday consumer staples 

From the cereal maker General Mills to Chipotle Mexican Grill to the paint maker Sherwin-Williams, a range of companies have been raising prices or plan to do so, in some cases to make up for higher wages that they're now paying to keep or attract workers.

'The inflation pressure we're seeing is significant,' General Mills CEO Jeff Harmening said at a recent investor conference. 'It's probably higher than we've seen in the last decade.'

The company, which makes such cereals as Honey Nut Cheerios, Lucky Charms, and Trix, has said it's considering raising prices on its products because grain, sugar and other ingredients have become costlier. 

Hormel Foods has already increased prices for Skippy peanut butter. Coca-Cola has said it expects to raise prices to offset higher costs.

Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will be raising prices on about 60 percent of its products. Proctor & Gamble has said it will raise prices for its baby, feminine and adult care products.

The 12-month price change of all items in selected categories is seen in the chart above. Inflation rose at a faster annual rate in May than any time since the Great Recession

The 12-month price change of all items in selected categories is seen in the chart above. Inflation rose at a faster annual rate in May than any time since the Great Recession

Average prices for eggs (dark blue), milk (red) and ground beef (light blue) are seen over the past 20 years in the chart above

Average prices for eggs (dark blue), milk (red) and ground beef (light blue) are seen over the past 20 years in the chart above

Shoppers are seen at a Vermont Costco last month. The sharp rise in consumer prices reflected a range of goods and services now in growing demand

Shoppers are seen at a Vermont Costco last month. The sharp rise in consumer prices reflected a range of goods and services now in growing demand

Used cars sit on the sales lot at Frank Bent's Wholesale Motors in El Cerrito, California in March. New car prices were up 3.3 percent on the year in May, while used car prices jumped a staggering 30 percent

Used cars sit on the sales lot at Frank Bent's Wholesale Motors in El Cerrito, California in March. New car prices were up 3.3 percent on the year in May, while used car prices jumped a staggering 30 percent

The 12-month inflation rate for food (blue), shelter (purple) and clothing (gold) is seen in the chart above

The 12-month inflation rate for food (blue), shelter (purple) and clothing (gold) is seen in the chart above

Restaurants have also been jacking up prices as they race to raise wages and lure potential employees back into the workforce. 

This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4 percent to cover the cost of raising its workers´ wages. 

In May, Chipotle had said that it would raise hourly wages for its restaurant workers to reach an average of $15 an hour by the end of June. 

Inflation in restaurant prices is far outpacing food on the grocery store shelves, perhaps reflecting the added labor costs.

Last month, restaurant prices jumped 4 percent on an annual basis, compared to 2.2 percent for groceries, Thursday's data showed. 

'There is stronger demand for hotel rooms, air travel, restaurant dining,' said Gus Faucher, chief economist at PNC Financial. 'Many businesses are also facing upward pressure on their costs such as higher wages.'

Gregory Daco, chief U.S. economist at Oxford Economics, noted that in some cases, a jump in the price of goods such as autos is raising the price of car rental services.

New car prices were up 3.3 percent on the year in May, while used car prices jumped a staggering 30 percent. 

Energy prices, including fuel and electricity, were the biggest inflation driver, soaring 29 percent from 12 months ago.

Gasoline, impacted in part by the ransomware hack of the Colonial Pipeline, rose 56 percent in May from a year ago.

On Thursday, the AAA Gas Price Index pegged the national average gas price at $3.073, up from $2.071 one year ago.

With roughly 70 percent of all goods in the U.S. delivered by truck, the soaring gas prices had the potential to drive up consumer prices even further. 

'It is going to be a muggy summer on the inflation front,' Daco said. 'There will be a pass-through from higher goods prices to higher prices for services.' 

Federal Reserve faces tough choices on interest rates after insisting that inflation is merely temporary 

The inflation pressures, which have been building for months, are not only squeezing consumers but also posing a risk to the economy's recovery from the pandemic recession. 

One risk is that the Federal Reserve will eventually respond to intensifying inflation by raising interest rates too aggressively and derail the economic recovery. 

But moving too slowly to raise interest rates, which limit inflation by putting the brakes on growth, could prove a costly mistake if the sharp increase in prices proves to be a lasting trend. 

The Fed, led by Chair Jerome Powell, has repeatedly insisted that inflation will prove temporary as supply bottlenecks are unclogged and parts and goods flow normally again. 

But some economists have expressed concern that as the economic recovery accelerates, fueled by rising demand from consumers spending freely again, inflation will continue to rise.

'The price spikes could be bigger and more prolonged because the pandemic has been so disruptive to supply chains,' Mark Zandi, chief economist at Moody's Analytics, said in advance of Thursday´s inflation report.

But 'by the fall or end of the year,' Zandi suggested, 'prices will be coming back to earth.'

That would be none too soon for consumers like Carmela Romanello Schaden, a real estate agent in Rockville Centre, New York. Schaden said she's having to pay more for a range of items at her hair salon. 

But she is feeling the most financial pain in the food aisle. Her monthly food bill, she said, is now $200 to $250 for herself and her 25-year-old son - up from $175 earlier in the year.

A package of strip steak that Schaden had normally bought for $28 to $32 jumped to $45. She noticed the increase right before Memorial Day but bought it anyway because it was for a family picnic. But she won´t buy it again at that price, she said, and is trading down to pork and chicken.

'I've always been selective,' Schaden said. 'When something goes up, I will switch into something else.'

Spiking energy prices contributed strongly to the rising inflation rate in May, following the Colonial Pipeline hack

Spiking energy prices contributed strongly to the rising inflation rate in May, following the Colonial Pipeline hack

Shoppers crowd the South Coast Plaza mall in Costa Mesa, California last month. Surging consumer demand is bumping up against labor and commodity shortages to drive up prices

Shoppers crowd the South Coast Plaza mall in Costa Mesa, California last month. Surging consumer demand is bumping up against labor and commodity shortages to drive up prices

Passengers are seen at the Houston airport last month. The surge in travel, dining and entertainment as pandemic restrictions lift has driven increased demand

Passengers are seen at the Houston airport last month. The surge in travel, dining and entertainment as pandemic restrictions lift has driven increased demand


So far, Federal Reserve officials haven't deviated from their view that higher inflation is a temporary consequence of the economy´s rapid reopening, with its accelerating consumer demand, and the lack of enough supplies and workers to keep pace with it. 

Eventually, they insist, the supply of commodities and labor will rise to match demand. 

Officials also note that year-over-year gauges of inflation now look especially large because they are being measured against the early months of the pandemic, when inflation tumbled as the economy all but shut down. In coming months, the year-over-year inflation figures will likely look smaller.

Still, last month, after the government reported that consumer prices had jumped 4.2 percent in the 12 months ending in April, Fed Vice Chair Richard Clarida acknowledged; 'I was surprised. This number was well above what I and outside forecasters expected.'

And the month-to-month readings of inflation, which aren´t subject to distortions from the pandemic have also been rising since the year began.

Some economists say they fear that if prices accelerate too much and stay high too long, expectations of further price increases will take hold. 

That, in turn, could intensify demands for higher pay, potentially triggering the kind of wage-price spiral that bedeviled the economy in the 1970s.

'The market is starting to worry that the Fed may be going soft on inflation, and that could let the inflation genie out of the bottle,' said Sung Won Sohn, a professor of economics and finance at Loyola Marymount University in Los Angeles.

In April, the price of used cars and trucks jumped a record 10 percent. Hotel and motel prices also set a monthly record. 

Tickets for sporting events and home furniture surged, too, along with TVs, audio products and smart home devices. So did the cost of toys, games and playground equipment. Fares for Uber and Lyft are up, too.

Rising commodity costs are forcing Americans to pay more for items from meat to gasoline. 

Prices for corn, grain and soybeans are at their highest levels since 2012. The price of lumber to build homes is at an all-time high. 

More expensive commodities such as polyethylene and wood pulp have translated into higher consumer prices for toilet paper, diapers and most products sold in plastic containers. 

Half of the 50 states - all led by Republicans - are refusing a federal boost to unemployment benefits in an effort to push jobless workers back into the job market. A labor shortage is contributing to inflation

Half of the 50 states - all led by Republicans - are refusing a federal boost to unemployment benefits in an effort to push jobless workers back into the job market. A labor shortage is contributing to inflation 

This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4% to cover the cost of raising its workers´ wages as the chain tries to attract more employees. Above a Texas Chipotle is seen on Wednesday

This week, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4% to cover the cost of raising its workers´ wages as the chain tries to attract more employees. Above a Texas Chipotle is seen on Wednesday


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