A measure of prices that is closely tracked by the Federal Reserve rose 5.8% last year, the sharpest increase since 1982, as brisk consumer spending collided with snarled supply chains to raise the costs of food, furniture, appliances, and other goods. The report Friday from the Commerce Department also said that consumer spending fell 0.6% in December, per the AP. A wave of omicron cases discouraged many Americans from traveling, eating out, or visiting theaters and other entertainment venues. At the same time, incomes rose 0.3% last month, providing fuel for future spending.
The inflation figure that the government reported Friday is its personal consumption expenditures index. Though the consumer price index is a better-known barometer, the Fed tends to track the PCE in setting its interest rate policies. The PCE index tracks actual purchases consumers make each month, while the CPI follows a fixed market basket of goods. Earlier this month, the government said the CPI jumped 7% last year, also the fastest pace in nearly four decades. Prices have jumped in the past year as Americans have spent freely, helped by large stimulus checks in the spring and higher pay. Spending on autos, electronics and other goods jumped 12% in 2021, the government reported Wednesday, the biggest increase since 1946.
Stubbornly high inflation has hammered household budgets, wiped out last year's healthy wage gains, and posed a severe political challenge to President Biden and Democrats in Congress. It also led the Federal Reserve to signal Wednesday that it plans to raise interest rates multiple times this year beginning in March to try to get accelerating prices under control. Chair Jerome Powell also made clear that the Fed will move to shrink its huge $8.9 trillion in bond holdings soon after it starts raising rates, another step that will likely tighten credit, slow spending, and potentially weaken the economy.
Speaking at a news conference Wednesday, Powell acknowledged inflation has gotten "slightly worse" in the past month. He cautioned that higher prices "have now spread to a broader range of goods and services," after initially affecting sectors of the economy, like factory-made products for homes, that were most disrupted by the pandemic. Powell also said the Fed is increasingly focused on the question of whether rising wages are acting as a primary driver of inflation, by forcing companies to charge more to cover their higher labor costs. Such a "wage-price spiral," which the US hasn't experienced since the 1970s, can make inflation difficult to cool.
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