Key inflation rate in July jumps 3.6% from last year, hits 30-year high

The rate of inflation in the U.S. increased again in July, meeting Wall Street expectations while also drove to the highest level in over 30-year, indicating new strains on consumers and businesses as the economy recovers from the pandemic.

The Commerce Department on Friday reported the Personal Consumption Expenditure or PCE price index in July increased 4.2% in a year — the highest rate since the first Gulf War in January 1991.

The index rose 0.4% from the previous month, the fifth significant increase in a row.

The core PCE price index, which the Federal Reserve monitors to measure the inflation, was unchanged from June, which was revised up one-tenth of a percentage point, the U.S. Bureau of Economic Analysis reported.

Excluding volatile food and energy prices, the index rose 3.6% year over year and gained 0.3% from the previous month.

The Fed set its inflation target to a flexible rate of 2% a year for the long run and insists inflation will fall back towards the target once the economy normalizes and widespread shortages of labor and materials fade away. The shortages have mostly been blamed for rising inflation.

The PCE index is viewed as a more accurate measure of inflation than the consumer price index or CPI as it tracks a broader range of goods and services.

Although personal income surged 1.1% for the month, beating Wall Street’s estimate of 0.3%, the growth of consumer spending, which accounts for more than two-thirds of all economic activity in the country, has slowed.

Consumer spending has increased 0.3%, in line with expectations, after advancing by 1.1 percent in June.

Demand is shifting back to services like travel and leisure. Still, spending hasn’t been enough to compensate for the decline in goods purchases, which are also being hurt by shortages, particularly of automobiles.

The Fed has viewed inflation pressures this year as largely the result of temporary pressures. However, officials recently acknowledged that the situation might persist somewhat longer than they initially thought.

“With global supply chain and logistics bottlenecks looking set to persist into 2022 and labor costs continuing to grow, inflation could prove to be more stubborn than many have been anticipating,” Richard Moody, the chief economist of Regions Financial, told MarketWatch.

Much of the current inflation pressure is coming from energy and food, which rose 23.6% and 2.4%, respectively, compared to the year earlier.

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