News and Commentary

The Fed’s Favorite Inflation Measure Hits Three-Decade High
WASHINGTON - JANUARY 22: The Federal Reserve building is seen January 22, 2008 in Washington, DC. The Fed cut its benchmark interest rate by three-quarters of a percentage point after two days of tumult in international markets due to fear of a recession in the United States. (Photo by Chip Somodevilla/Getty Images)
Chip Somodevilla via Getty Images

The Federal Reserve’s preferred measure of inflation reached its highest level since 1991.

According to the Bureau of Economic Analysis, the Personal Consumption Expenditures Price Index — which the central bank uses to inform monetary policy decisions — hit a year-over-year rate of 4.1% in October.

CNBC reported:

Along with the surge in prices came an increase in the amount consumers spent, which rose 1.3% for the month, higher than the 1% estimate. That came with a 0.5% increase in personal income, which was well ahead of the 0.2% estimate.

Inflation continued to be reflected most in surging energy costs, which rose 30.2% from a year ago, while food prices increased 4.8% during the span. Services inflation gained 6.3%, the same as in September, while goods inflation jumped 7.3%, up from the 6.4% pace in the previous month.

Business Insider explained:

The Fed and the Biden administration had expected price growth to weaken as the economy normalized. Yet hurdles in the recovery have kept prices soaring at a historic pace. Reopening fueled a spending surge as Americans deployed pent-up savings. The wave of demand quickly overwhelmed inventories across the US, and producers were left with massive backlogs and still-damaged supply chains. With little supply available to service shoppers’ voracious spending, businesses hiked prices.

After nearly two years of aggressive monetary stimulus following COVID-19 and the lockdown-induced recession, the Federal Reserve announced plans to taper its bond purchases. Earlier this month, policymakers revealed that they would decrease its $120 billion in monthly asset purchases by $15 billion in both November and December.

However, many economists expect that the central bank will further tap the breaks on its quantitative easing. Based on comments released from the Federal Reserve’s meeting in early November, some policymakers pushed for a faster dialing back of asset purchases.

“They’re going to accelerate tapering in December, and it now looks like growth could easily cross 6% and could approach 7% in the fourth quarter,” Grant Thornton chief economist Diane Swonk told CNBC. “The economy is strong and hot. It’s not a bad thing. It’s a boom. You can’t escape it. The Fed has to adjust.”

“If they want to have any distance whatsoever between tapering and liftoff, they need to get it out of the way. It’s justified. We have a strong economy,” she predicted.

President Biden nominated Fed Chair Jerome Powell — who was originally tapped by President Donald Trump in 2018 — to a second term.

“When our country was hemorrhaging jobs last year and there was panic in our financial markets, Jay’s steady and decisive leadership helped to stabilize markets and put our economy on track to a robust recovery,” Biden said in a statement. “Jay is a believer in the benefits of what economists call ‘maximum employment.’ That’s an economy where companies have to compete to attract workers instead of workers competing with each other for jobs, where American workers get steady wage increases after decades of stagnation, and where the benefits of economic growth are broadly shared by everyone in the country, not just concentrated for those at the top.”

Biden also selected Lael Brainard — a progressive favorite and a current member of the Fed’s Board of Governors — as vice chairwoman of the Board.

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