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Inflation Roars Back To 1981 Levels on Record Gas Prices: Stocks Slump

Record high gas prices and surging energy costs lifted U.S. inflation back to the highest levels in four decades last month, Commerce Department data indicated Friday.

Updated at 11:13 am EST

U.S. inflation accelerated again last month, data from the Bureau of Labor Statistics indicated Friday, snuffing out bets that consumer price pressures are starting to peak in the world's biggest economy.

The headline consumer price index for the month of May was estimated to have risen 8.6% from last year, up from the 8.3% pace recorded in April and well ahead of the Street consensus forecast of 8.3%. The May reading was the fastest since December of 1981. 

On a monthly basis, inflation was up 1%, the BLS said, compared to the April increase of 0.3% and again topping the Street forecast of 0.7%.

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.6% on the month, and 6% on the year, the report noted, with the both the annual and monthly reading coming in ahead of the Street consensus forecast and near the highest levels since 1983.

Peak inflation bets began to surface last month when the Fed's preferred measure, the core PCE Price Index, eased from the highest levels in 1983 thanks in part to price declines for cars, clothes and services.

Record high gasoline prices, which nudged closer to the $5 a gallon mark last night, according to data from AAA, will continue to drive headline inflation rates as crude oil holds firmly above the $120 per barrel mark, while food prices extend their recent run-up amid transport snarls and uneven planting seasons. 

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"A higher-than-expected CPI number seals the deal on investors’ fears, and though consumers may be experiencing high prices in their day-to-day, especially at the pump, it’s disappointing to see that we don’t have a lid on inflation yet, despite the Fed’s efforts," said Mike Loewengart, managing director for investment strategy at E*TRADE from Morgan Stanley. 

"It’s unlikely the Fed will change course next week, but we could see the rate hike campaign intensify," he added. "In the meantime, it’s important to keep in mind that lowering inflation won’t happen overnight, and it remains to be seen if this read is an outlier or an upward trend."

Stocks on Wall Street were active following the data release, with the Dow Jones Industrial Average last seen 715 points lower while the S&P 500 slumped 104 points, or 2.6%.

Benchmark 10-year U.S. Treasury bond yields rose 9 basis points to 3.139% following the data release while 2-year notes extended gains to trade at 3% for the highest since June 2008.

The US dollar index, which tracks the greenback against a basket of six global currencies, rose 0.91% to a near 20-year high to 104.16.

The CME Group's FedWatch tool is showing a 92% chance of a 50 basis point rate hike next week, but a 40.3% chance of the 75 basis point move  in July.

The Atlanta Federal Reserve's GDPNow forecasting tool, a real-time benchmark, suggests U.S. economic growth has now slowed to a 0.9% clip, following the -1.4% contraction estimate for the three months ending in March.