Key U.S. inflation figure rises to 5% for October

• Personal Consumption Expenditure Price Index rose to 5% in October

• Personal income increased by 0.5% in October from a month earlier

Consumer spending increased in October as the prices of goods and services continued to escalate while manufacturers battle pandemic-induced supply-line shortages. 

The personal consumption expenditure price index, including food and energy, rose to 5% in October from a year ago. 

Figures released by the Commerce Department on Friday showed that U.S. personal spending growth increased 1.3% in October. Goods prices rose by 5.9% while services increased by 6.4%.

Despite the pandemic, the reduction of stimulus payments, and ongoing supply chain issues added to investor fears about inflation, consumer demand remains steady amid rising private wages and salaries, the Commerce Department’s report said. 

On a monthly basis, the core PCE increased, which excludes food and energy, rose 0.4%. This measure is closely tracked by the Federal Reserve and fuels concerns surrounding price rise. 

BACKGROUND

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. 

The Fed had announced that it intended on maintaining the inflation index to 2% but would consider letting it average higher than usual to promote employment. However, in the past few months, the PCE index has constantly been recorded at its highest level in the last thirty years. Yet, the Fed has been lenient towards this surge citing heavy fiscal stimulus and supply chain bottlenecks.

The comparison with 2020 figures that were extremely low during the first lockdown is also one of the factors that have driven this increase.

PERSONAL INCOMES

The report attributed the increased personal spending, to large pay hikes and healthy household balance sheets, especially after several rounds of government stimulus.

The savings rate for October was 7.3%, equating to $1.34 trillion, a decline from the 8.2% rate in September when savings totaled $1.48 trillion.

Inflation is expected to surge even higher in the coming months as persistent supply chain challenges and ongoing hiring difficulties push prices higher. 

Separate data out Wednesday showed applications for U.S. state unemployment benefits plunged last week to a level not seen since 1969, in part reflecting seasonal factors. U.S. third-quarter economic growth was also revised slightly. 

Inputs: Bureau of Economic Analysis

Picture Credits: The Balance