Fed’s preferred measure of inflation jumps to highest level since 1991

The Federal Reserve’s favorite inflation measure has taken another leap, reaching its highest level in three decades.

Federal data on Friday showed that the core personal consumption expenditure (PCE) price index, excluding volatile food and energy, rose 0.4 percent in June for an annual gain of 3.5 percent, the largest gain since December 1991.

The total PCE price index, including food and energy, rose 0.5 percent in May for an annual gain of 4 percent, the fastest pace since the Great Recession in 2008.

It comes just days after Fed Chair Jerome Powell again urged price increases to stabilize soon, but admitted at a news conference that “there is a possibility that inflation could be higher and more persistent than we anticipated.”

The price index of core personal consumption expenditure (PCE), excluding volatile food and energy, rose in June at its highest annual rate since 1991

The price index of core personal consumption expenditure (PCE), excluding volatile food and energy, rose in June at its highest annual rate since 1991

It comes just days after Fed Chair Jerome Powell again urged price increases to stabilize soon, but admitted at a news conference that there is “the possibility that inflation could be higher and more persistent than we anticipated”

The main PCE price index is the Fed’s preferred inflation measure and is used for the target of 2 percent annual inflation.

It is a measure of the consumer price index, which reached 5.4 percent year-on-year in June, its highest level in 13 years.

On Wednesday, the Federal Reserve’s open market committee voted unanimously to continue the central bank’s easy money policy, once again dismissing rising inflation as “transient” and saying that COVID-19 still poses risks to the economy.

“The course of the economy remains dependent on the course of the virus,” the committee said in a statement.

“Progress in vaccinations is likely to continue to mitigate the effects of the public health crisis on the economy, but risks to the economic outlook remain,” it added.

The 11-member committee voted to keep federal fund rates close to zero and continue to flood the market with massive bond purchases “until substantial further progress is made” in boosting employment.

Rising inflation rates and consumer outrage over higher prices have sparked calls to tighten monetary policy and prevent prices from spiraling out of control, especially from conservatives.

Customers buy produce at a Chicago supermarket last month.  Rising inflation has prompted calls for the Fed to tighten monetary policy and end monthly bond purchases of $120 billion

Customers buy produce at a Chicago supermarket last month.  Rising inflation has prompted calls for the Fed to tighten monetary policy and end monthly bond purchases of $120 billion

Customers buy produce at a Chicago supermarket last month. Rising inflation has prompted calls for the Fed to tighten monetary policy and end monthly bond purchases of $120 billion

Two measures of inflation, the PCE index (blue) and the consumer price index (red) are shown above

Two measures of inflation, the PCE index (blue) and the consumer price index (red) are shown above

Two measures of inflation, the PCE index (blue) and the consumer price index (red) are shown above

“Inflation has risen significantly and is likely to remain high in the coming months,” Fed Chairman Powell admitted on Wednesday, before again blaming price increases on temporary factors such as supply chain disruptions.

Powell has repeatedly insisted that inflation will be “transient,” and he was pressured on Wednesday to define the term.

‘The [price] increases will happen, we’re not saying they will reverse,” he explained. “But inflation is stopping.”

The Fed has two central mandates: keeping inflation at 2 percent a year and achieving “maximum employment.”

The two mandates are often conflicting, as the Fed tries to control inflation by raising interest rates and stimulate employment by lowering interest rates.

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

But spiraling inflation can be dangerous, eroding consumers’ purchasing power and hitting low-income families and older retirees the hardest.

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

The Fed said Wednesday it would continue to buy its monthly purchases of $80 billion in federal debt and $40 billion in mortgage-backed securities indefinitely until the economy makes “substantial further progress.”

The unemployment rate in the US remained high at 5.9 percent in June and there are currently nearly 7 million fewer people in work than before the pandemic.

However, a record number of job openings are also available, with the number of vacancies roughly equal to the number of people on unemployment benefits, a situation that has puzzled labor economists.

The Fed says it wants to see further labor market gains before cutting its monthly $120 billion bond purchases, the committee said Wednesday.

Friday’s report from the Commerce Department also found that personal incomes, which fuel spending, rose 0.1 percent in June after two months of sharp declines, as several bailout programs waned. government.

The assets on the Federal Reserve's balance sheet over time are shown above.  Since last February, the Fed has more than doubled its balance sheet to $8.2 trillion

The assets on the Federal Reserve's balance sheet over time are shown above.  Since last February, the Fed has more than doubled its balance sheet to $8.2 trillion

The assets on the Federal Reserve’s balance sheet over time are shown above. Since last February, the Fed has more than doubled its balance sheet to $8.2 trillion

In its June report on consumer spending, the government said purchases of goods rose a modest 0.5 percent, while spending on services rose a stronger 1.2 percent. Part of the increase was due to higher prices.

As vaccinations have increased and the economy has increasingly reopened, more Americans have shifted spending from the physical goods many bought while sitting on the couch at home, to spending on services, from haircuts to plane tickets to restaurant meals.

Overall, household spending has fueled a robust economic recovery from the pandemic recession.

On Thursday, the government estimated that the economy grew 6.5 percent year-on-year in the past quarter — with consumer spending providing much of the profit.

Consumer spending grew a robust 11.8 percent year-on-year in the quarter, pushing GDP levels above its peak in Q4 2019.

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