The personal consumption expenditures price index (PCE index) is an obscure data point that is a favorite of the Federal Reserve. This is because it accurately reflects the real-world economic experience of consumers.
The PCE index, which excludes the highly volatile food and energy sectors of the economy, rose by 5.2% in the past year as of January. This marks the 10th straight month that the inflation rate has been above the Fed’s target of 2%.
If you include food and energy, the inflation rate rose to 6.1% — the highest since 1982.
The PCE report was accompanied by data on household spending, which showed that consumer spending rose faster than expected last month, climbing by 2.1%. The spending increase reversed a 0.8% decline in December.
The data is further evidence of a spike in prices illustrated by a separate measure – the Consumer Price Index – which showed inflation rose by 7.5% in January from the previous year, a 40-year high.
Raging inflation has inflicted financial pain on millions of U.S. households, particularly low-income families, eroding wage gains and setting up a massive political challenge for President Biden, who has seen his approval rating sink in conjunction with the rising prices. It has also forced the Federal Reserve to concede that surging prices are not transitory and to take steps to dramatically normalize policy.
A year ago, we were told not to panic about inflation. Can we panic now, Mr. President?
Related: Inflation Costs American Households $276 More Per Month
The Fed was planning on raising interest rates gradually anyway but must now consider raising them faster and higher than planned. But with the Russian invasion of Ukraine ratcheting up energy prices, Biden will have to find another villain to blame besides “Big Oil” for the increase. And many experts are predicting a similar spike in food prices due to supply chain interruptions.
Grocery manufacturers are concerned that, while the vast majority of ingredients and materials for American products are sourced domestically, the economic effects of Russia’s invasion of Ukraine will be global, according to Katie Denis, vice president of communications and research for the industry organization Consumer Brands Association.
“We’re already seeing energy prices rise and commodities futures for wheat and corn spike. That’s going to prompt concern when costs to make and ship goods continue to set records and consumer demand continues to be above levels not seen since March 2020,” she said. “There is no slack in the system, making weathering disruption significantly more difficult.”
The war in Ukraine will have the effect of a lit match thrown into a pool of gasoline. Energy and food prices will take off, which means almost every other product on the shelves will also be going up. And the reason has less to do with the new war than it does with the condition of the American economy when Russian troops crossed the border into Ukraine.
Biden and the Democrats have been denying the reality that dumping $6 trillion into the economy in less than a year and a half has anything to do with the rise in prices. Now, the war in Ukraine has supercharged that effect.
Ultimately, the president and his party will face a reckoning for their arrogant profligacy.
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