This is not a good sign.
Fueled by rapidly rising prices, supply chain disruptions, and worker shorters, a crucial indicator of annual inflation monitored closely by the Federal Reserve is reaching a pace last reached nearly four decades ago.
According to the Personal Consumption Expenditures (PCE) price index data, in the year through December, prices soared by 5.8%, which beat November’s increase of 5.7% and reached inflation last seen in 1982.
From November to December, prices increased by 0.4%; 0.5% if energy and food costs are excluded.
When the unstable measurements –– food and energy –– are excluded from the index, prices rose 4.9% year-on-year in the year leading up to December, a figure last experienced in September 1983. This measurement is also the one the Fed will use as a gauge to track inflation, making December the ninth consecutive month inflation increased beyond the central bank’s target range of 2%.
The cost of energy is largely to blame. Rising 29.9% in the last year, energy’s costs are the most significant contributor. However, food costs, which rose 5.7%, services inflation, up 4.2%, and goods inflation up 8.8%, also played a role in the surging inflation.
Another worrying figure is consumer spending, which fell 0.6% in December, as car, electronics, and clothing purchases declined. The decline could be attributed to the higher prices, the Omicron variant causing businesses to shut down, or a lack of supply.
Compounding the rising inflation is the cost of labor which increased 1% in the last quarter of 2021 from the previous year, causing the year’s total gain to reach 4%.
On Wednesday (January 26), Fed Chairman Jerome Powell told reporters that the Fed was “attentive to the risks that persistent wage growth in excess of productivity could put upward pressure on inflation,” insinuating this metric had been a critical component on the Fed’s decision to start tightening policy.
This latest data also confirms data from the Consumer Price Index, which placed inflation at 7% in December, up from the same time in 2020. It also indicates that inflation is not transitory, as the Federal Reserve emphasized, forcing the central bank to concede and begin normalizing policy.