Inflation hits 30-year high, PCE shows, as US faces large deficits

The numbers: US inflation rose again in July, pushing last year’s increase to a 30-year high, pointing to new pressures on businesses and consumers as the economy recovers from the pandemic.

The personal consumer spending or PCE price index rose 0.4% in July, show government figures. It was the fifth major increase in a row.

The inflation rate in the 12 months ending July rose from 4% to 4.2%, the highest rate since the first Gulf War in 1991.

Federal Reserve leaders insist that inflation will fall back toward 2% once the economy returns to normal and widespread labor and material shortages disappear. The deficits are largely attributed to rising inflation.

The central bank wants inflation to average 2% per year in the long term, using the PCE meter as a starting point. Still, senior Fed officials recently acknowledged that high inflation could last a little longer than they anticipated.

Read: Companies still optimistic even as Delta deals a small blow to the economy

Big picture: There is no doubt that high inflation is weighing on consumers and headwinds for the economy. For example, taking inflation into account, consumer spending fell in July even as incomes rose.

The big debate about inflation is how fast it fades and by how much.

Some Fed critics fear that the combination of very low interest rates and high government spending will keep inflation well above the Fed’s target well into next year and add to consumer misery.

Still, most investors seem to be siding with the Fed. Bond investors, who are normally very sensitive to inflation, do not demand higher returns. And the stock market is still setting new records.

The Fed, for its part, will begin to withdraw its unprecedented support from the economy. Yet most senior officials do not seem to be incited to do so because of high inflation. They just think the economy is strong enough to stand on its own two feet.

Main details: A separate inflation measure excluding volatile food and energy prices rose 0.3% in July. It is known as the core rate and is seen by the Fed as a more reliable weather vane for inflationary trends.

The rise in core interest rates over the past 12 months has remained unchanged at 3.6%, keeping it at its highest level in 30 years.

The PCE index is seen as a more accurate measure of inflation than the consumer price index or CPI. It tracks a wider range of goods and gives more weight to replacement – when consumers buy a cheaper product to replace a more expensive product.

What do they say? “With global supply chain and logistics bottlenecks expected to persist into 2022 and labor costs continue to rise, inflation may prove more persistent than many anticipated,” said Regions Financial’s chief economist Richard Moody.

Market reaction: The Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
rose in Friday trading.