Key U.S. inflation index rises to 3.5% in June, consumer spending also rises

The Personal Consumption Expenditure (PCE) index rose 3.5% year-on-year in June, slightly below the 3.6% estimate. The gain was slightly ahead of the 3.4% May increase.

This measure is closely tracked by the Federal Reserve and fuels concerns surrounding price rise. 

PCE index measures price changes in consumer goods and services, excluding food and energy, in the U.S. economy. It has been the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions, since 2012.

Consumer spending in the U.S. rose 1% faster than the expected estimate of 0.7%, as personal incomes rose 0.1%, beating the estimate of a 0.2% decline. 

To fill open positions and attract workers, employers have been increasing the pay and are providing other benefits. The personal saving rate fell to 9.4% but remained higher than pre-pandemic levels.

The Fed officials have reiterated their belief that the inflation surge will be transitory. They attribute the pressure to supply chain bottlenecks and industries sensitive to the economic reopening. The desired inflation target has been set at 2% by the Fed, but it is open to tolerating higher levels temporarily as the economy tries to get back to full employment.

Meanwhile, economists worry that a continuous acceleration in inflation could start a perpetual cycle in which workers demand higher wages, and to cover those costs, employers, in turn, raise the sale prices.

Compensation costs rose 0.7% for the three months ending in June while wages and salaries were up 0.9%. Compensation costs for the year, increased 2.9%, up from 2.7% a year earlier, according to a separate report Friday from the Labor Department.

The PCE index including food and energy rose the highest since July 2008 to 4% from a year earlier. Energy prices rose 24.2% and food moved 0.9% higher.

Picture Credits: AP