A key inflation indicator the Federal Reserve uses to set policy rose 3.4% in May, the fastest increase since the early 1990s, the Department of Commerce reported on Friday.
Although the gain was the largest since April 1992, it was in line with the Dow Jones estimate and the markets reacted little to the news. The equity market posted mostly solid gains, while government bond yields were moderately higher.
The rise in the core price of consumer spending reflects the rapid pace of economic expansion and the resulting price pressures, amplifying how far the nation has come since the 2020 shutdown caused by the Covid pandemic.
While the readings could add to inflation concerns, Fed officials continue to insist that they view the current situation as temporary and likely to fade if conditions return to normal.
The core index rose 0.5% during the month, which was actually below the estimate of 0.6%.
Including volatile food and energy prices, the PCE index rose 3.9% for the year and 0.4% for the month.
Most of the rise in inflation was due to energy, with prices rising 27.4% while food costs rose only 0.4%.
The headline surge was the largest since August 2008, just before the worst of the financial crisis hit, pushing inflation down a lower path that would last during the longest economic recovery in US history.
Inflation has risen recently due to a confluence of factors. These include supply chain disruptions where key product manufacturers have been unable to keep pace with the increased demand that came with the economic reopening.
Rising house prices have also played a role as timber costs have skyrocketed, although that trend has recently reversed.
After all, current numbers are being influenced by what economists call “base effects” or skewed comparisons with those a year ago when government restrictions suspended much of the economy. These base effects are likely to dissipate when the June numbers are released next month.
A separate part of Thursday’s report showed that consumer spending for the month was flat from an estimate of 0.4% increase, while personal income fell 2%, less than the expected 2.7% decrease. These numbers, too, had been skewed, mainly by government economic controls, which greatly boosted both revenue and expenditure.
The personal savings rate was 12.4%, a decrease of 14.5% compared to the previous month.
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