Key inflation indicator rises 3.4% from May last year, fastest since 1992

A key inflation indicator that the Federal Reserve uses to make policy decisions rose 3.4% in May from a year ago, as prices of goods and services continue to surge in the U.S., the Commerce Department reported on Friday.

The gain was the fastest increase since April 1992 that the core personal consumption expenditures (PCE) index has risen over 12 months.

However, the Dow Jones estimated the rise by surveying economists, and markets reacted little to the news. Instruments like futures showed an indication of a rise of about 150 points for the Dow at the open. At the same time, sovereign bond yields were mostly flat.

The index, which excludes highly volatile energy and food, rose 0.5% from April, below Dow’s estimation of a 0.6% increase. Last month it rose 0.7%.

Including energy and food prices, it increases 3.9% in a year and 0.4% in May 2021. Energy price contributed the most to the index, with prices rising 27.4% against a 0.4% gain in food costs.

The core personal consumption expenditures or the PCE index tracks prices across a wide range of goods and services and reflects the rapid pace of economic expansion. The indicator amplified the fact that how much the prices have increased since the COVID-19 pandemic-induced shutdown.

PCE index is considered a broader measure for inflation than the Labor Department’s Consumer Price Index (CPI), which rose 5% in May from a year ago.

Though the reading could add to inflation concerns, it is estimated that the very low inflation rate from this time last year may have distorted year-over-year comparison as the economy reopens.

The pandemic gutted the economy, and consumers were spending less in 2020, and after the reopening, the labor shortage and the supply chain disruption are preventing most of the businesses from meeting the escalating demand, which is driving up the prices.

Thursday’s report also showed that consumer spending was flat for the month, while a 0.4% increase was estimated. Personal income declined 2%, less than the expected 2.7% decline.

Those numbers were also distorted, primarily due to government stimulus checks that sharply boosted income and spending.

Picture Credit: Bureau of Economic Analysis