PCE Index Hit Highest Level in November Since 1982
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, climbed 5.7 percent in November from a year earlier.
Federal Reserve policymakers are finishing a year that has been colored by surprisingly high inflation with yet another piece of bad news: The price measure they follow most closely touched its highest level since 1982.
The Personal Consumption Expenditures price index, which is the one the Fed officially targets when it aims for 2 percent annual inflation on average over time, climbed 5.7 percent in November from a year earlier, the Commerce Department said on Thursday. Part of the jump owed to gasoline prices — they were up sharply in November but have moderated this month — but a so-called core index that strips out food and fuel prices also increased sharply, to 4.7 percent.
The sharp run-up in inflation this year, and the fact that it has lingered, leaves policymakers and economists trying to assess what will happen in 2022.
Rapidly rising prices are lasting longer than policymakers had hoped and have become broader in recent months. Earlier this year, big price increases were largely reserved to goods that were in short supply as demand surged and as overtaxed shipping lines struggled to keep up. More recently, they have spread into categories like rent — which can last longer.
The inflation data released on Thursday came alongside data on incomes and spending that showed that consumers saved less in November and that their consumption barely budged after adjusting for inflation, which could simply be a sign that consumers did their holiday shopping early amid supply chain snarls. Should slower spending last, weaker demand could eventually weigh down price increases.Butthe United States could end up in an unpleasant situation in which growth is less robust while inflation is still high.
What to Know About Inflation in the U.S.
Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.
“Consumers are able to purchase less because prices are rising, and that is starting to put the brakes on real spending growth,” said Andrew Hunter, senior U.S. economist at Capital Economics. That could eventually push down prices, he said, but “inflation is likely to remain certainly higher than the Fed wants for a while.”
The fresh inflation reading is further evidence of the pop in prices that a more timely and related measure — the Consumer Price Index — had previously shown.
In doing so, it keeps pressure on officials at the Fed, who are tasked with keeping inflation moderate and setting the stage for full employment, and who have grown increasingly worried about the surge in prices. They pivoted on policy this month, speeding up their plans to cut back on economic support and preparing to raise interest rates early next year if necessary. Higher interest rates can weaken down demand for everything from homes to cars, helping to slow down the economy and restrain inflation.
The big question for officials at the central bank — and in the Biden administration — is what will come next. With the Omicron variant of the coronavirus surging around the world, it is unlikely that tangled supply chains will return to normal quickly. At the same time, rising housing costs could keep inflation high even as some of the most painful trends of 2021, including a surge in used-car prices tied to a computer chip shortage, moderate.
Mr. Hunter said that November could be the peak for the headline inflation index, because gas prices have moderated recently, but the core measure could continue rising for a few months before beginning to slow.
“We need to be humble here,” he said, noting that probably “one or two times last year, we thought we were at peak.”
Fed officials expect inflation to ease to 2.6 percent by the end of next year, their most recent economic forecasts showed, but that would remain substantially above their 2 percent goal. None of the Fed’s 18 officials expect inflation to drop below 2 percent next year.
High inflation has been sapping consumer confidence as people face down rising costs, even at a time when job openings far exceed available workers and wages are rising.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe the price burst will fade, but some concerning signs suggest it could last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities — food, housing and especially gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“It’s a devastating thing for people who are working class and middle-class,” President Biden said at the White House on Tuesday, adding: “It really hurts.”
But costs also are increasing because households have saved a lot after repeated government stimulus checks and months locked at home. People have been spending voraciously on goods, as many people avoid travel and other services because of the virus. That has been giving companies the power to raise prices on goods without losing customers.
It is the Fed’s job to lean against those demand-tied inflation pressures.
“While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services,” Jerome H. Powell, the Fed chair, said at a news conference last week. He suggested that if prices remain uncomfortably high, the Fed will do more to keep them under control.
“We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation,” Mr. Powell said. “We are committed to our price stability goal.”