Consumer inflation posts biggest increase since 2008, CPI shows

The numbers: The cost of living rose in June by the largest amount since 2008, leaving the increase in U.S. inflation over the past 12 months well over 5%.

The consumer price index leaped 0.9% last month, the government said Tuesday. The cost of used cars accounted for more than one-third of the increase.

Economists polled by The Wall Street Journal had forecast a 0.5% increase

The rate of inflation in the 12 months ended in June climbed to 5.4% from 5% in the prior month. The last time prices rose that fast was in 2008.

Another closely watched measure of inflation that omits volatile food and energy also roe 0.9% In June. The 12-month rate increased to 4.5% from 3.8% and stood at a 29-year high.

The core rate is closely followed by economists as a more accurate measure of underlying inflation.

Read: Higher U.S. inflation isn’t going away just yet. Here’s why

Big picture: The rapid recovery in the economy has had an unwanted side-affect: Higher inflation.

Businesses can’t get enough supplies or labor to keep up with surging sales, forcing them to pay higher prices for almost everything. In turn, they are trying to pass those extra costs onto customers.

Read: Job openings hit record 9.2 million, but workers aren’t easy to find

The Federal Reserve is betting big that widespread shortages will fade away once the U.S. and global economies return to normal.

Ditto for inflation: The central bank predicts inflation will taper off toward its 2% target by next year, using its preferred PCE price barometer.

Yet even the Fed admits it was caught off guard by how high inflation has risen. There’s a risk inflation could stay higher for longer than it expected, according to minutes of the Fed’s most recent strategy session.

Read: Fed admits inflation rose much higher than expected, but it still insists price increases are temporary

So far most investors have been unruffled. Stocks are still rising and bond yields have actually fallen in the past two months. The opposite usually happens when inflation is viewed as a big threat.

Market reaction: The Dow Jones Industrial Average

and S&P 500

were set to lower in Tuesday trades after the CPI report.

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