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Business

Key inflation indicator rose 3.4 percent from a year ago, fastest since 1992

By
Will Feuer
Published June 25, 2021
Updated June 25, 2021, 1:13 p.m. ET

A key inflation indicator rose 3.4 percent in May from a year ago as costs continued to surge in the US just as the economy mounts a comeback from the pandemic, the feds said Friday.

It’s the most since April 1992 that the core personal consumption expenditures index has risen over 12 months, according to data from the Commerce Department.

The so-called core PCE index, which excludes volatile food and energy, rose 0.5 percent from April, after rising 0.7 percent from March to April, the Commerce Department reported.

Economists surveyed by Dow Jones expected core PCE prices to rise by 0.6 percent in May from a month earlier, and 3.4 percent from a year ago.

The index tracks prices across a variety of goods and services and is considered a broader measure for inflation than the Labor Department’s Consumer Price Index, which rose a whopping 5 percent in May from a year ago.

Federal Reserve officials consider the core PCE index to be among the best gauges for inflation, though they watch various statistics.

Anu Gaggar, senior global investment analyst for Commonwealth Financial Network, acknowledged that prices “grew at a very robust pace,” but said it’s likely not reflective on longterm inflation.

The Shops at Crystals, an upscale shopping mall in Las Vegas.
The Shops at Crystals, an upscale shopping mall in Las Vegas. Alamy Stock Photo

With the month-over-month inflation coming in lower than expected, she said the data gives weight to the argument that inflation is only temporary this summer.

Ryan Detrick, chief market strategist for LPL Financial, echoed Gaggar’s views.

“Today’s inflation data should calm some nerves about runaway inflation,” he said. “Remember, the PCE is the Fed’s favorite measure of inflation, and it very well could be near a peak in inflation, which should help the Fed keep it’s dovish policy stance.”

Including food and energy, which are more volatile than other goods, the Commerce Department’s index jumped 3.9 percent from a year ago and 0.4 percent from April.

One driver of the massive year-over-year gain is very low inflation this time last year, when the pandemic gutted the economy and consumers were staying indoors and spending less. That could distort year-over-year comparison as the economy reopens.

Those comparisons aside, prices are spiking throughout the economy for a variety of reasons. Most of the inflation increase in May came from energy, with prices spiking 27.4 percent compared with just a 0.4 percent rise in food costs, according to the data released Thursday.

Prices are also rising throughout the economy due to a global microchip shortage that’s hurt car manufacturing and has sent the prices of used cars soaring.

Commodities from lumber to corn and other crops have risen dramatically, though some of those prices have crested and begun to fall again in recent weeks. A labor shortage that’s preventing many businesses from fully reopening and meeting demand is also driving up some costs.

A separate part of Thursday’s report showed that consumer spending was basically flat for the month, disappointing economists who expected a 0.4 percent increase.

Personal income declined 2 percent over the same period, less than the expected 2.7 percent decline feared by economists.

With income down as federal pandemic benefits are cut off in a number of states, rising costs likely kept some consumers from spending as much as economists hoped.

Many companies have chosen in recent weeks to pass those rising costs on to consumers, sending prices for new houses, food — and more — upward.

The Penguin Hotel & Front Porch Cafe, South Beach, Miami, Florida.
The Penguin Hotel & Front Porch Cafe in South Beach, Miami, Florida. Alamy Stock Photo

For now, the jump in prices appears to reflect rapidly strengthening consumer demand as Americans venture out of their homes after a year of social distancing and pandemic-related restrictions.

But the rise in costs is also fueling a debate among economists over whether the inflation bout will be only temporary as the economy reopens, or whether massive federal spending will drive costs higher for years to come.