Inflation Remains High, the Fed’s Favored Inflation Index Shows

The Federal Reserve is closely watching inflation, and the numbers have remained sharply elevated in recent months.

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The Fed’s favorite inflation index remained at 30-year high as pay surged.

Shoppers in New York City on Wednesday. Consumer demand and supply chain snarls are keeping inflation elevated.Credit…Jutharat Pinyodoonyachet for The New York Times

Oct. 29, 2021Updated 10:24 a.m. ET

Annual inflation is climbing at the fastest pace in three decades in the United States, according to data released Friday, keeping pressure on the Federal Reserve and White House as they try to calibrate policy during a tumultuous period marked by strong consumer demand and quickly rising prices for couches, cars and housing.

Prices climbed 4.4 percent in the year through September, according to the Personal Consumption Expenditures price index, which is the central bank’s preferred inflation gauge. That beats out recent months to become the fastest pace of increase since 1991.

From August to September, prices climbed 0.3 percent, in line with what economists expected and slower than rapid numbers posted earlier in the summer. Policymakers may take that as a sign that inflation was moderating, if still rapid on an annual basis, coming into the fall.

The figures came as separate data showed wages and benefits picking up for working Americans, and especially employees in service occupations, in the three months through September. Surging pay is good news for workers, but it could worry economic policymakers as a sign that price gains will continue as employers try to cover their rising labor costs.

Jerome H. Powell, the Fed chair, has increasingly acknowledged that inflation is lasting longer than central bankers had expected. Fed officials believe inflation will fade as supply chain snarls unravel and consumer demand for goods cools, but it remains unclear when that will happen. Janet L. Yellen, the Treasury secretary, has predicted that rapid price jumps will cool by later next year.

Still, the current pace of inflation has become an uncomfortable political problem for President Biden and has created a delicate balancing act for the Fed, which is still trying to get the labor market back to full strength.

The data released on Friday confirms what more timely inflation measures like the Consumer Price Index have already shown: Price gains are unusually brisk in the United States. That is happening in large part because supply chains are struggling to keep up with strong demand, thanks to virus-tied factory shutdowns, clogged ports and a shortage of transit workers, among other factors. The combination has made it hard to buy a kitchen table or a used car, and has caused the prices of many goods to jump sharply.

Personal spending continued at a solid pace in September, data released on Friday showed, climbing 0.6 percent from August — slower than the prior month, but in line with what economists had expected.

Consumption continued even as a measure of incomes that includes benefit payments dropped in September, a decline that came primarily because the government gave households less money. Personal income decreased 1 percent last month as pandemic unemployment insurance expansions expired and other pandemic relief programs wrapped up or paid out less.

But even as government help is waning, labor income is picking up. New data showed that Americans are earning more on the job: A measure of employment costs that traces wages and benefits climbed by 1.3 percent in the third quarter, more than the 0.9 percent economists had expected and the fastest pace in data since the series started in 1996.

On an annual basis, the Employment Cost Index climbed 3.7 percent, the fastest pace since 2004. Wage gains are especially rapid in service industries, which have been struggling to lure back workers as they reopen from pandemic lockdowns.

The Fed is closely watching measures of both wages and inflation expectations, which have risen in recent weeks, as it tries to assess whether price gains might spiral out of control.

“The risk is that ongoing high inflation will begin to lead price- and wage-setters to expect unduly high rates of inflation in the future,” Mr. Powell said last week. And if inflation seemed likely to stay high, “we would certainly use our tools to preserve price stability, while also taking into account the implications of our maximum employment goal.”

Understand the Supply Chain Crisis

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Covid’s impact on the supply chain continues. The pandemic has disrupted nearly every aspect of the global supply chain and made all kinds of products harder to find. In turn, scarcity has caused the prices of many things to go higher as inflation remains stubbornly high.

Almost anything manufactured is in short supply. That includes everything from toilet paper to new cars. The disruptions go back to the beginning of the pandemic, when factories in Asia and Europe were forced to shut down and shipping companies cut their schedules.

First, demand for home goods spiked. Money that Americans once spent on experiences were redirected to things for their homes. The surge clogged the system for transporting goods to the factories that needed them — like computer chips — and finished products piled up because of a shortage of shipping containers.

Now, ports are struggling to keep up. In North America and Europe, where containers are arriving, the heavy influx of ships is overwhelming ports. With warehouses full, containers are piling up at ports. The chaos in global shipping is likely to persist as a result of the massive traffic jam.

No one really knows when the crisis will end. Shortages and delays are likely to affect this year’s Christmas and holiday shopping season, but what happens after that is unclear. Jerome Powell, the Federal Reserve chair, said he expects supply chain problems to persist “likely well into next year.”

As prices climb, the Fed is preparing to slow down the large-scale bond purchases it had been using to lower long-term borrowing costs and support the economy. The central bank has been buying $120 billion in Treasury and mortgage-backed securities, but it is poised to announce its plan to slow that program as soon as next week. Mr. Powell has said buying could stop altogether by mid-2022.

That would leave the Fed in a position to raise its policy interest rate, its more traditional and arguably more powerful tool, should it need to do so to tamp down price increases. That rate has been set near zero since March 2020.

When the Fed raises interest rates, it makes it more expensive to borrow to buy houses, cars and washing machines. As demand cools, supply catches up and price gains moderate or even reverse, reducing inflation.

But the downside is that slower consumption and economic growth also lead to less business expansion and hiring. Slowing the job market is an unattractive prospect at a moment when millions of people remain out of work following lockdowns early in the pandemic and with concerns lingering about health and child care.

The Biden administration is trying to make sure that concerns about prices do not undermine its economic agenda. Ms. Yellen said over the weekend that she expects inflation to ease by the middle of 2022.

“Americans have not seen inflation like we have experienced recently in a long time,” Ms. Yellen acknowledged on CNN’s “State of the Union” on Oct. 24. “As we get back to normal, expect that to end.”

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