The release of U.S. CPI data for May provided another upside surprise for inflation. Monthly CPI inflation was 0.6% in May, down from 0.8% in April, but enough to push annual CPI inflation up to 5.0% from 4.2% in April. This is the highest annual inflation rate recorded since 2008.

Core inflation, defined as "all items except food and energy," rose 0.7% in May, down from 0.9% in April, but raised annual core inflation to 3.8% from 3.0% in April.

How much of this increase can still be explained by temporary factors? Together, new and used cars contributed 37 basis points to the core CPI, accounting for half of this month's increase (see table). The automotive sector continues to be affected by the global chip shortage, and it is difficult to predict how long this effect will last, as the situation will take time to resolve, even beyond 2021.

With monthly inflation running high in March, April, and May, it is clear that a new picture of inflation is emerging. Annual inflation rises if the observations that drop out are smaller than the observations that enter the calculations. In fact, as shown in the chart, this "base effect" played an important role in the increase in inflation in March and April as expected, but had less influence in May. 

It is now increasingly clear that the new monthly inflation rates are also high. To stabilize inflation at 2%, monthly inflation rates must average 0.17%. However, in February, monthly inflation was 0.4%, in March 0.6%, in April 0.8%, and now in May 0.6%. While it is too early to say how monthly inflation rates will evolve in the coming months, further declines are necessary for the rise in inflation to be temporary.