Last Updated: Oct. 1, 2021 at 1:42 p.m. ET First Published: Oct. 1, 2021 at 8:40 a.m. EST Market Watch By Jeffry Bartash
The numbers: The cost of goods and services rose sharply again in August and left the rate of U.S. inflation at a 30-year high, with all signs pointing to price pressures snaking into next year.
The personal consumption expenditure price index climbed 0.4% in August, the government said Friday. It was the sixth straight big increase.
The rate of inflation in the 12 months ended in August edged up to 4.3% from 4.2% — the highest rate since 1991, when George H.W. Bush was president.
Until very recently, Federal Reserve leaders insisted inflation would start to fall back to toward pre-pandemic levels of 2% or less by the end of this year.
Yet in the past week senior central bank leaders acknowledged inflation could remain high well into 2022 because of ongoing shortages of crucial business supplies and and even labor.
The central bank wants inflation to average 2% a year in the long run, using the PCE gauge as its starting point. Yet the Fed is prepared to let inflation run above its target for a while to make up for a period of very low inflation over the last decade.
Big picture: The highest rate of inflation in decades is squeezing families and businesses and acting as a bit of a drag on the economy. The big question is how long it lasts.
Most of the increase in inflation is tied to the full reopening of the economy. A huge burst of pentup demand overwhelmed the ability of businesses to keep up, especially with computer chips and other materials in short supply.
Faced with higher costs, businesses have raised prices, too. Thus the surge in inflation.
These shortages were expected to ease by now, but instead it looks like it could get even worse. Fed Chairman Jerome Powell said the shortages could last until next summer.
Most economists still think the Fed is right and that will slip back toward its 2% goal, but that it will take longer to happen.
“Supply-chain problems have led to higher prices for many goods and some services, but some of those high prices are now starting to fall and others are increasing at a slower pace,” said chief economist Gus Faucher of PNC Financial Services. [T]he danger of runaway inflation is fading.”
Others analysts think inflation could remain elevated for the next few years.
“I am a strong believer that we are going to be looking at closer to 2.5% inflation for an extended period of time,” said Joel Naroff of Naroff Economic Advisors. “By the Fed saying they are going to inflation average, I think they think the same thing.”
Key details: A separate measure of inflation that strips out volatile food and energy prices rose 0.3% in August. 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%, but it was also at a 30-year peak.
The PCE index is viewed as a more accurate measure of inflation than the better known consumer price index. 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.
Also on Friday, the government said consumer spending rose 0.8% in August. The increase was just half as big if inflation is taken into account.
What they are saying? “Even with more modest monthly inflation gains in the upcoming months, year-over-year increases will be high into 2022,” said senior economist Will Compernolle at FHN Financial.
Market reaction: The Dow Jones Industrial Average DJIA, +1.43% and S&P 500 SPX, +1.15% rose in Friday trades.
For now most investors have bought into the Fed argument that high inflation is temporary. Bond yields have remained at historically low levels for the most part and stocks DJIA, +1.43% SPX, +1.15% aren’t far from a record high, though gains have been harder to come by lately.