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Inflation rises unexpectedly, food and energy prices are up

The gains seen in the consumer price index could result in the Federal Reserve increasing interest rates earlier than expected.

By Ananth Baliga
Apples at a grocery store in Washington, DC. (UPI/Billie Jean Shaw)
Apples at a grocery store in Washington, DC. (UPI/Billie Jean Shaw)

WASHINGTON, June 17 (UPI) -- Consumer prices rose sharply and unexpectedly in May, a result of higher food and energy prices, pushing the annualized inflation rate above the Fed's 2 percent target.

U.S. inflation rose by 0.4 percent, marking the biggest gain in over 12 months, following a 0.3 percent increase in consumer prices in April, according to a Labor Department report out Tuesday. This new data would encourage Federal Reserve policymakers who are looking for inflation to rise above the two percent mark before raising short-term interest rates.

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Economists polled by Bloomberg estimated a 0.2 percent increase in consumer prices. Tuesday's numbers exceeded the upper limit of the poll, which was 0.3 percent.

Inflation has been steadily increasing for the past three months, suggesting economic activity is improving along with the weather. For the 12 months ending May, the consumer price index was up 2.1 percent, above the Fed's target for raising interest rates.

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"We expect inflation continuing to rise gradually," said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. "By year's end, we suspect the Fed will acknowledge a neutral set of risks around the inflation outlook."

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Food prices were up 0.7 percent, whereas electricity and gas prices increased 0.9 percent. While food and energy costs can be volatile, fluctuating month-to-month, upticks in prices were seen across the board. Airline fares, medical care, apparel, new vehicles and shelter, such as rent and hotel lodging, all increased for May.

The report comes out as the Fed conducts its FOMC meeting, which started Monday, where the central bank is expected to continue to scale back its bond buying program, now pegged at $45 billion. This report could also accelerate the Fed's decision to raise rates, which would encourage saving and push down inflation.

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