Key Inflation Gauge Tracked by the Fed Remains a High 6.3%
Inflation, which is closely monitored by the Federal Reserve, increased 6.3% in May compared to a year prior and remained unchanged at its April level.
Thursday’s report from the Commerce Department provided the latest evidence that painfully high inflation is pressuring American households and inflicting particular harm on low-income families and people of color.
The government’s report also said that consumer spending rose at a sluggish 0.2% rate from April to May. In the face of rising inflation, consumer spending may be declining. But it’s still helping fuel inflation itself, especially as demand grows for services ranging from airline tickets and hotel rooms to restaurant meals and new and used autos.
Prices increased 0.6% month to month from April to May. This is an increase of 0.2% from March to April.
As the midterm elections approach, President Joe Biden’s chronically high inflation is threatening to undermine the economy. According to a survey by The Associated Press/NORC Center for Public Affairs Research, seventy nine percent of Americans consider the economy poor. Americans struggling with food and fuel prices are seeing inflation surpass the 36% rate of unemployment.
Fed began a series aggressive interest rate rises to counter the slowing of growth. This will make borrowing more expensive and could lead to a recession. Two weeks ago, the Fed raised its key rate by three-quarters of a point — its largest hike in nearly three decades — and signaled more large rate increases to come.
The Fed tends to monitor Thursday’s inflation gauge, called the personal consumption expenditures price index, even more closely it does the government’s better-known consumer price index. While the components of the two indexes differ — CPI tends to weigh gasoline and housing costs more heavily and to show higher inflation — the two gauges tell the same basic story: Inflation is running dangerously hot.
Thursday’s report showed that consumer incomes rose 0.5% from April to May, staying slightly ahead of inflation. The savings rate also increased slightly last month to 5.4%, but it is still well below the peak of almost 34% in April 2020. As a precaution from COVID-19, many Americans were saving money and checking their government aid checks.
Soaring prices are a consequence of the economy’s unexpectedly swift rebound from the pandemic recession of 2020. Consumers went on an unprecedented spending spree, fueled by record-low interest rates, government stimulus checks and savings that they had made while at home in the aftermath of the pandemic. This purchase frenzy caught many businesses unaware and overtook factories and ports. Due to the shortage of labor and goods, prices rose.
Although the Fed took a while to acknowledge the seriousness of the threat of inflation, it dismissed it as mostly a temporary result of supply chain bottlenecks. However, spiking inflation has been difficult to stop and the Fed is now playing catch up with large rate increases that could lead to economic collapse.
Inflation has increased anxiety among consumers. Their purchasing power has been eroded as prices have increased faster than they earn. A measure of consumer confidence has reached its lowest point in 16 months, with Americans’ outlook darkened by inflation fears, especially gas and food prices.
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