Inflation rate hits 30-year high, PCE shows, as U.S. confronts major shortages

The numbers: The rate of inflation in the U.S. rose again in July and drove the increase over the past year to a 30-year high, pointing to fresh strains on businesses and consumers as the economy recovers from the pandemic.

The personal consumption expenditure or PCE price index climbed 0.4% in July, government figures show. It was the fifth big increase in a row.

The rate of inflation in the 12 months ended in July edged up to 4.2% from 4% — the highest rate since the first Gulf War in 1991.

Federal Reserve leaders insist inflation will fall back toward 2% once the economy returns to normal and widespread shortages of labor and materials fade away. The shortages have mostly been blamed for rising inflation.

The central bank wants inflation to average 2% a year in the long run, using the PCE gauge as its starting point. Yet senior Fed officials have recently acknowledged that high inflation might persist somewhat longer than they expected.

Read: Businesses still upbeat even as Delta deals small blow to the economy

Big picture: There’s no doubt that high inflation is bothering consumers and acting as a headwind on the economy. After taking inflation into account, for instance, consumer spending actually fell in July even as incomes surged.

The big debate over inflation is how quickly it fades and by how much.

Some Fed critics worry the combination of very low interest rates and high government spending will keep inflation far above the Fed’s target well into next year and intensify the misery for consumers.

Yet most investors appear to have sided with the Fed. Bond investors, normally very sensitive to inflation, aren’t demanding higher returns. And the stock market is still setting new records.

The Fed, for its part, is set to start withdrawing its unprecedented support for the economy. Yet most senior officials do not appear to have been swayed to do so because of high inflation. They simply think the economy is strong enough to stand more on its own.

Key details: A separate measure of inflation that strips out volatile food and energy prices rose 0.3% in July. It’s known as the core rate and is viewed by the Fed as a more reliable weathervane for inflationary trends.

The increase in the core rate over the past 12 months was unchanged at 3.6%, keeping it at a 30-year high.

The PCE index is viewed as a more accurate measure of inflation than the consumer price index or CPI. It tracks a broader range of goods and gives more weight to substitution — when consumers buy a cheaper product to substitute for a more expensive one.

What they are saying? “With global supply chain and logistics bottlenecks looking set to persist into 2022 and labor costs continuing to grow, inflation could prove to be more stubborn than many have been anticipating,” said chief economist Richard Moody of Regions Financial.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.69%

and S&P 500
SPX,
+0.88%

rose in Friday trades.

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