The Fed’s Preferred Inflation Gauge Sees Biggest Increase in 30 Years

November 24, 2021

Prices continued to increase quickly in October, with the Federal Reserve’s preferred metric for inflation posting the largest increase since the early 1990s.

Prices for the personal consumption expenditure (PCE), excluding food and energy, increased 4.1% from a year ago, according to the Commerce Department. This is the biggest year-over-year increase since 1991. The Fed prefers to use PCE readings, which are wider-reaching and based on GDP data, to measure inflation instead of the more commonly cited consumer price index (CPI), which is based on surveying consumers in urban areas.

The Fed also prefers the so-called “core” PCE, which excludes volatile categories like energy and food. When these are included, PCE jumped 5% in October, the fastest gain since November 1990.

With prices rapidly increasing, U.S. consumers may be starting to have trouble keeping up. The Commerce Department’s report found that the personal savings rate has declined. Personal savings totaled $1.32 trillion in October, with households saving 7.3% of their disposable income. This is down from September, when savings totaled $1.48 trillion and the savings rate was 8.2%.

In an effort to combat inflation, the Fed has already started tapering their monthly asset purchases and indicated at least one interest rate increase next year. Investors are betting that the Fed will be compelled to act more aggressively, and following the release of the latest inflation report, traders are now rising in three interest rate hikes in 2022.

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