The Commerce Department said in an Aug. 27 statement that core PCE rose by 3.6 percent over the year in July, matching June’s level, which was an increase from 3.5 percent in May and 3.1 percent in April.
The last time the core PCE inflation gauge saw a similar year-over-year jump was in July 1991, while the highest level the measure has hit is 10.2 percent in February 1975, when the economy was gripped in a troubling upward wage-price spiral fueled by rising inflation expectations on the part of consumers.
The Fed looks to core PCE as a key inflation measure that informs its monetary policy, which has an inflation target of a longer-run average of 2 percent.
On a monthly basis, the core PCE gauge rose by 0.3 percent between June and July, after rising by 0.5 percent the prior month, suggesting that inflationary pressures may have peaked.
This comes as Fed officials met virtually for an annual economic symposium in Jackson Hole, Wyoming, on Aug. 27, with investors watching closely for signs of when and how the central bank may begin to roll back its extraordinary support measures for the economy. In response to the pandemic hit to the economy, the Fed last year dropped interest rates to near zero and set out on a massive asset purchasing program, buying around $80 billion in Treasury securities and $40 billion in mortgage securities per month.
In a speech on Aug. 27, Federal Reserve Chair Jerome Powell addressed inflationary pressures, acknowledging a “sharp run-up in inflation” driven by the rapid reopening of the economy, while reiterating his oft-repeated view that price pressures would moderate once supply-side shortages and bottlenecks further abate.
Powell acknowledged the relatively high level of the Aug. 27 core PCE print, noting that it was “well above our 2 percent longer-run objective” and that both businesses and consumers “widely report upward pressure on prices and wages.”
“Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary,” he said, arguing that the current spike in inflation is largely driven by a relatively narrow group of goods and services that have been directly impacted by the pandemic and the reopening of the economy.
“We are also directly monitoring the prices of particular goods and services most affected by the pandemic and the reopening, and are beginning to see a moderation in some cases as shortages ease. Used car prices, for example, appear to have stabilized; indeed, some price indicators are beginning to fall,” Powell said.
Powell said officials haven’t thus far noted broad-based inflationary pressures, but acknowledged that evidence of such pressures spreading more broadly through the economy would be concerning and would prompt a swift policy response.
The Fed chief also addressed wage pressures. In the 1970s, upward pressure on wages combined with growing consumer expectations of further price increases to push prices higher, prompting the Fed to raise interest rates. Powell said there’s little evidence of this phenomenon today.
“If wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage-price spiral’ seen at times in the past,” Powell said.
“Today we see little evidence of wage increases that might threaten excessive inflation. Broad-based measures of wages that adjust for compositional changes in the labor force, such as the employment cost index and the Atlanta Wage Growth Tracker, show wages moving up at a pace that appears consistent with our longer-term inflation objective.”
Powell also noted disinflationary forces such as technology and globalization, arguing that there’s little evidence those have suddenly reversed or abated.
“It seems more likely that they will continue to weigh on inflation as the pandemic passes into history,” he said.
Powell said the baseline economic outlook is for the economy to continue progressing toward maximum employment, with inflation returning closer to the Fed’s goal of averaging 2 percent over time.