Fed’s Preferred Inflation Measure Tops 3% As U.S. Economy Strengthens

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U.S. consumer prices soar. Will the Fed remain accommodative?

Recently released data shows that the U.S. economy continues to recover from the damage inflicted by the coronavirus, Robison said, noting that weekly initial jobless claims dropped to 406,000 for the week ending May 22. “While still above pre-pandemic levels, that’s the lowest number the U.S. has seen since the onset of the pandemic—and it’s especially noteworthy given that new weekly claims topped 6 million a little over a year ago,” he remarked. In addition, the government’s second estimate of first-quarter GDP (gross domestic product) came back unchanged, at an annualized rate of 6.4%, Robison added.

Further evidence of the strengthening U.S. economy was found in the release of the core PCE (personal consumption expenditures) price index, published May 28 by the Commerce Department, he said. “On a year-over-year basis, this index jumped 3.1% in April,” Robison stated, noting that the core PCE index serves as the U.S. Federal Reserve (the Fed)’s preferred measure of inflation. While the increase was above the central bank’s target of 2%, it was largely expected, due to supply chain bottlenecks and base effects stemming from last spring’s drop in prices, he noted.

Because of this, Fed officials continue to see current inflationary pressures as transitory, Robison said—a point recently emphasized by Vice Chairman Richard Clarida in a May 25 interview. “This view, when combined with the fact that the U.S. is still far from reaching full employment, means that we can probably expect monetary policy to remain accommodative through at least the end of the year,” he stated. Ultimately, the Fed is much more likely to allow inflation to overshoot its target than to risk a disinflationary environment, such as the one Japan has grappled with since the 1990s, Robison noted.

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