Inflation Surge Adds to Pressure on Fed

The U.S. Federal Reserve’s preferred measure of inflation jumped in October to its highest level in nearly 32 years, increasing pressure on the central bank to tweak monetary policy.

The Commerce Department reported Wednesday that personal consumption expenditures prices excluding food and energy rose 4.1% last month from a year ago, the biggest jump since January 1991. The core PCE index was up 0.4% from September, matching economists’ average forecast.

Including food and energy, the PCE index rose 5% year-on-year, the fastest gain since November 1990, and 0.6% sequentially, the biggest jump since June 2008 and a significant acceleration from the 0.3% growth seen in September. Economists had forecast a gain of 0.7%.

Surging energy costs pushed PCE inflation, rising 30.2% from a year ago, while food prices increased 4.8%.

“The rise in the Federal Reserve’s preferred inflation gauge will only add pressure on the central bank to take quicker action to maintain stable prices,” The New York Times said, adding that “Price increases have shown few signs of fading, as some officials in the Biden administration and at the Fed argued they would earlier this year.”

“The central bank is facing growing calls to hasten plans to end their stimulative bond-buying program and to begin to raise interest rates, a process that could risk slowing job gains and economic growth,” the Times noted.

Fed officials have said they believe inflation is at the point where they can start tapering the bond purchase, but markets are anticipating that interest rates may have to rise soon as well.

Traders are now pricing in three 25 basis point rate hikes in 2022, with the probability rising following Wednesday’s inflation report.

According to Business Insider, prices have been rising at a historic pace in part because the reopening of the economy after pandemic lockdowns “fueled a spending surge as Americans deployed pent-up savings.”

“The wave of demand quickly overwhelmed inventories across the US, and producers were left with massive backlogs and still-damaged supply chains. With little supply available to service shoppers’ voracious spending, businesses hiked prices,” Business Insider said.

Commerce Department, core PCE, Federal Reserve, inflation, interest rates, Personal Consumer Expenditures index