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U.S. inflation reaches the highest level in 30 years

PUBLISHED ON 2021-10-02 03:45:00 EST Yashasvini

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KEY POINTS

-- Personal Consumption Expenditure Price Index rose to4.3% in August

-- Personal spending growth increased 0.*% from a month earlier

 

The cost of goods and services in the U.S. reached its highest level for the first time in three decades, fueling concerns that this spending will eventually hit consumer spending. 

The personal consumption expenditure price index, rose to its highest level since 1991, to 4.3% in August from a year ago. The last time it reached 4.2% was in 1991 when George H.W. Bush was president. 

The latest development comes at a time when the country is reopening for business. Analysts attribute this rapid hike in inflation indicators to the reopening of the economy, leading to a surge in demand at a time when supply shortages ravage industries.

Figures released by the Commerce Department on Friday showed that U.S. personal spending growth increased 0.8% from a month earlier, following a downwardly revised 0.1% decline in July. Spending in July was previously reported as a 0.3% gain.

Goods prices rose by 5.5% while services increased by 3.6%.

On a monthly basis, the core PCE increased, which excludes food and energy, rose 0.3% for a second month. This measure is closely tracked by the Federal Reserve and fuels concerns surrounding price rise. 

BACKGROUND

PCE index measures price changes in consumer goods and services, excluding food and energy, in the U.S. economy. It has been the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions, since 2012. 

The Fed had announced that it intended on maintaining the inflation index to 2% but would consider letting it average higher than usual to promote employment. However, at this rate, the core PCE index will go way above levels that haven’t been recorded since the 1990s. Yet, the Fed has been lenient towards this surge citing heavy fiscal stimulus and supply chain bottlenecks.

The comparison with 2020 figures that were extremely low during the first lockdown is also one of the factors that have driven this increase.

In the past week, senior central bank leaders said that inflation could remain high even in 2022 due to ongoing shortages of crucial business supplies and labor.

While participating in a virtual panel event on Wednesday, Federal Reserve Chair Jerome Powell said that the supply chain bottlenecks were temporary. “It’s very difficult to say how big the effects will be in the meantime, or how long they will last, but we do expect that we’ll get back, we’ll get through that,” he said.

PERSONAL INCOMES

The saving rate dropped to 9.4% in August from 10.1%. The stimulus checks and enhanced unemployment benefits provided by the government had kept this figure elevated but since aSeptember majority of the states have discontinued the weekly pandemic relief.

The PCE index report also stated that personal income rose 0.2%, after increasing 1.1% last month due to a boost from an advance disbursement of the child tax credit. Wages and salaries climbed 0.5%.

Disposable personal income, or after-tax income adjusted for inflation, decreased 0.3% in August.  

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