The Federal Reserve’s favorite measure of inflation is at the highest level since 1991 in July, the Bureau of Economic Analysis reported. The price index for American consumer spending, the PCE index, rose at a rate of 4.2% in the year ended July, showing the quickest surge not seen since January 1991.
Inflation is happening among the pandemic recovery due to supply chain constraints for goods and manufacturing. Incomes for Americans rose by 1.1% last month also supported by higher wage growth along with government benefits such as child tax credits, and stimulus checks form President Biden’s American Rescue Plan. Many stated ceased the pandemic unemployment claims early due to the start of the rebound of the economy and the re-openings of businesses.
The increase in personal income in July primarily reflected increases in government social benefits and compensation of employees (table 3). Within government social benefits, an increase in “other” social benefits (more than accounted for by advance Child Tax Credit payments as authorized by the American Rescue Plan) was partly offset by a decrease in unemployment insurance, reflecting a decrease in payments from the Pandemic Unemployment Compensation program. Within compensation, the increase was primarily in private wages and salaries, reflecting Bureau of Labor Statistics Current Employment Statistics.
The $42.2 billion increase in current dollar PCE in July reflected an increase of $102.6 billion in spending for services and a decrease of $60.4 billion in spending for goods (table 3). Within services, increases were widespread across all spending categories, led by food services and accommodations. Within goods, decreases were widespread across most spending categories, led by motor vehicles and parts, recreational goods, and vehicles, as well as clothing and footwear. These decreases were partly offset by an increase in gasoline and other energy goods. Detailed information on monthly PCE spending can be found on Table 2.3.5U.
At the Jackson Hole Symposium, Fed Chairman Jerome Powell mentioned an eventual rolling back of the central bank’s emergency stimulus measures. Powell also commented, “there’s “little evidence” of a wage-price spiral that would point to more worrisome inflation. He said he believed that inflation rise is temporary, and it is due to the pandemic recession.
Powell reiterated that he believes the inflation spikes are only temporary side-effects from restarting the economy will be short but severe due to the pandemic recession.
