Fed’s Preferred Inflation Measure Hits 28-Year High

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The Federal Reserve’s preferred measure of inflation surged to 3.1% last month, its highest level in decades, confirming what we already knew: Prices in the U.S. are rising—and fast.

Key Takeaways

  • The Federal Reserve’s preferred measure of inflation rose to 3.1% in April, its highest level since July 1992.
  • Higher inflation has been expected as the economy reopens, but the pace in April may raise some eyebrows.
  • The Federal Reserve has offered reassurance that higher inflation is temporary, but a growing number of Fed officials are acknowledging that they may have to consider some change in course.

The Personal Consumption Expenditures (PCE) index, which tracks consumer prices, was 3.6% higher than in April 2020 and 0.7% higher than in March, according to data released Friday by the Bureau of Economic Analysis. Excluding food and energy prices, which tend to be more volatile, it jumped 3.1%. This core inflation rate was the highest since July 1992 and beat economists' expectations of 2.9% to 3%.

The latest figures confirm the large jump in inflation shown by April’s Consumer Price Index (CPI), although like the CPI, they come with somewhat of a disclaimer. Last spring, when the economy was reeling from the effects of the COVID-19 pandemic, there was very low inflation, making the baseline for the year-over-year comparison unusually low. Higher inflation has been expected as a natural byproduct of the economy reopening.

But month-to-month increases aren’t influenced by such base effects, and April’s increase was  the largest for a single month since October 2001. That’s sure to raise some eyebrows, particularly as more people feel the effects of price hikes and wonder whether they are here to stay.

The Federal Reserve has said that the higher inflation will be temporary as the economy creaks back to life, and has vowed to stand by policies that pump money into the economy—like buying up bonds and keeping benchmark interest rates low—until there is “substantial further progress” in the economic activity and employment levels. The Fed aims to keep core inflation averaging 2% over time, and has signaled it won’t need to rein in the economy by raising interest rates until at least 2024.

Will the Fed Shift Its Stance?

This viewpoint could be changing, though, as more data comes in. During a speech Wednesday, Fed Gov. Randal Quarles joined a growing number of officials from the central bank in acknowledging that they may soon have to start at least talking about changing tactics. Quarles agreed, for now, that “a significant portion” of rising inflation could be chalked up to these transitory factors.

But, with inflation running “significantly” above the Fed’s long-term target of 2%, he added that the U.S. could be close to a tipping point should spending—from all the savings consumers have accumulated during the pandemic—come in a greater quantity than the Fed expects, or at a faster rate. That, Quarles said, would put “significant upward pressure on inflation.”

Talk of all this inflation has caused consumers, too, to reconsider their view of the economy, according to the results of the University of Michigan’s most recent survey, released Friday. Consumers were less optimistic about the state of the economy in May, while also raising their expectations for year-ahead inflation to 4.6%, the highest in 10 years.

Elevated inflation will likely continue for the rest of the year, according to Oxford Economics, which said there’s no evidence that inflation is out of control.