U.S. consumer prices surged in April, with a key measure of underlying inflation blowing past the Federal Reserve‘s 2 percent target and posting its largest annual gain since 1992.
In the 12 months through April, the personal consumption expenditures price index vaulted 3.1 percent, the most since July 1992, after rising 1.9 percent in March, data on Friday showed.
A massive increase in the money supply to fund COVID stimulus, disruptions in the supply chain causing shortages, and pent up consumer demand as the pandemic wanes are all being blamed as reasons for the surge in inflation.
Though the new inflation measure exceeded economists’ forecasts, Fed Chair Jerome Powell has repeatedly insisted that higher inflation will be transitory, and the news is expected to have no impact on monetary policy.
The U.S. central bank slashed its benchmark overnight interest rate to near zero last year and continues to flood the economy with money through monthly bond purchases.
The Fed has signaled it could tolerate higher inflation for some time to offset years in which inflation was lodged below its 2 percent target, a flexible average.
The US M1 money supply, including cash and checking deposits, is seen increasing sharply during the pandemic in this Federal Reserve chart
A person shopper walks outside Tesla in the Meatpacking District of New York on May 23. Consumer spending is surging and contributing to rising inflation
The central bank views a controlled amount of inflation as good, because it encourages spending and investing, rather than hoarding cash.
But out-of-control inflation can be dangerous, eroding the spending power of consumers and hitting low-income families and elderly pensioners the hardest.
Analysts say supply constraints are playing a role, reflecting the shift in demand towards goods and away from services during the pandemic.
A reversal is underway, with Americans flying to vacation destinations and staying at hotels among other activities.
‘The great consumer spending rotation to services has begun,’ said Gregory Daco, chief U.S. economist at Oxford Economics. ‘As health conditions continue to improve and the economy reopens, generous fiscal stimulus, rebounding employment and rising optimism will help unleash pent-up demand.’
Consumer prices as measured by the personal consumption expenditures (PCE) price index, but excluding the volatile food and energy components, increased 0.7 percent last month amid strong gains in both goods and services.
That was the biggest rise in the so-called ‘core’ PCE price index since October 2001 and followed a 0.4 percent gain in March.
A sheet of United States one dollar bills is seen during production at the Bureau of Engraving and Printing in a file photo. Inflation fears are prompting questions about the money supply
The consumer price index for urban consumers shows an index of price increases over time
‘Many goods are in short supply amid very strong demand and supply chain disruptions, and some services prices are up sharply as consumers start to go out again,’ said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.
‘Shortages of labor in some industries are also contributing to higher prices. But many of these factors will prove transitory, and inflation will slow in the second half of 2021,’ he predicted.
Some economists are not convinced that higher inflation will be temporary.
A survey from the University of Michigan on Friday showed consumers’ one-year inflation expectations shot up to 4.6 percent in May from 3.4 percent in April, hurting household sentiment. Their five-year inflation expectations rose to 3.0 percent from 2.7 percent last month.
‘Concerns about the future can cause households to become more conservative in their spending,’ said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. ‘The Fed is guessing that the rise in inflation will be temporary, and it better be correct.’
Though consumer spending moderated last month as the boost to incomes from stimulus checks faded, households have accumulated at least $2.3 trillion in excess savings during the pandemic, which should underpin demand. Wages are also rising as companies seek to attract labor to increase production.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5 percent last month. Above, shoppers wall outside the Hudson Yard mall in Manhattan
Generous unemployment benefits funded by the government, problems with child care and fears of contracting the virus, even with vaccines widely accessible, as well as pandemic-related retirements have left companies scrambling for labor.
That is despite nearly 10 million Americans being officially unemployed. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5 percent last month. Data for March was revised higher to show spending surging 4.7 percent instead of 4.2 percent as previously reported.
The rise in spending was in line with expectations. Spending was held back by a 0.6 percent drop in outlays on goods. Though purchases of long-lasting goods such as motor vehicles rose 0.5 percent, spending on nondurable goods tumbled 1.3 percent. Outlays on services increased 1.1 percent, led by spending on recreation, hotel accommodation and at restaurants.
When adjusted for inflation, consumer spending slipped 0.1 percent after jumping 4.1 percent in March.
Despite last month’s dip in the so-called real consumer spending, March’s solid increase put consumption on a higher growth trajectory in the second quarter.
Personal income plunged 13.1 percent after surging 20.9 percent in March. With spending exceeding income, the saving rate dropped to a still-high 14.9 percent from 27.7 percent in March. Wages increased 1.0 percent for a second straight month.