The Fed’s Favorite Inflation Measure Hits Four-Decade High
WASHINGTON, DC - APRIL 28: U.S. President Joe Biden gives remarks before meeting with small business owners in the South Court Auditorium of the White House on April 28, 2022 in Washington, DC. During his remarks, President Biden spoke on the growing numbers of Americans pursuing small businesses in 2021 and how the continuing growth helps create jobs. (Photo by Anna Moneymaker/Getty Images)
Anna Moneymaker/Getty Images

The Federal Reserve’s preferred measure of inflation hit a 40-year high in March, according to Commerce Department data released on Friday.

The personal-consumption expenditures (PCE) index rose at an annualized rate of 6.6% last month, according to the Bureau of Economic Analysis. The report comes as prices continue to rise under strain from consumer demand, supply chain problems, and the ongoing war between Ukraine and Russia, according to The Wall Street Journal. Trillions of dollars spent by the federal government on pandemic aid have also fueled inflation.

The PCE index measures the price fluctuations in a basket of consumer goods and services to track the rate of inflation. Commerce Department analysts also separate off and measure core PCE, which excludes food and energy because of their volatility. Core CPI measured a 5.2% annualized increase in March, down from a revised 5.3% increase in February.

Federal Reserve Chairman Jerome Powell has recently signaled the Fed’s intention to raise interest rates to try and curb consumer demand. The Fed raised the federal funds rate a quarter of a percentage point last month, and additional rate hikes are expected to come throughout the year.

The Fed typically only changes the federal funds rate by a quarter point per each Federal Open Market Committee meeting, held once a quarter. Powell has floated raising the rate by half a percentage point at the next meeting this summer, however, if inflation does not slow down.

In a speech last month, Powell said that Fed officials “widely underestimated” the inflationary pressures and signals the U.S. has been experiencing for months. “The labor market is very strong, and inflation is much too high,” he said in a speech before the National Association for Business Economics, according to CNBC.

“We will take the necessary steps to ensure a return to price stability,” he said. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

“In normal times, when employment and inflation are close to our objectives, monetary policy would look through a brief burst of inflation associated with commodity price shocks,” he added. “However, the risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher, which underscores the need for the Committee to move expeditiously as I have described.”

U.S. Gross Domestic Product fell for the first time in nearly two years in the first quarter of 2022. President Joe Biden, on the heels of the poor economic news, asserted that the U.S. economy is still strong, blaming the contraction on “technical factors.”

“The American economy — powered by working families — continues to be resilient in the face of historic challenges,” Biden said in a statement. “While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of COVID-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength.”

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