KEY US INFLATION GAUGE SEES SHARPEST RISE IN NEARLY 40 YEARS

Dig out your cassette tapes and your Sony Walkman, because the United States economy is having a very 1980s kind of moment.

Personal Consumption Expenditures, a measure of underlying inflation in the US economy, surged 5.7 percent in November over the same period a year ago, the US Department of Commerce said on Thursday. That is the sharpest spike in PCE in nearly 40 years.

Stripped of volatile food and energy, core PCE rose 4.7 percent in November from the same period a year ago.

PCE is a closely watched metric because consumer spending drives roughly two-thirds of growth in the world’s largest economy. It is also the Federal Reserve preferred inflation gauge.

Thursday’s data from Commerce signalled that higher prices may be weighing on consumer spending.  Americans decreased purchases of goods and spent more on services last month, while personal disposable incomes adjusted for inflation shrank 0.2 percent in November from the previous month.

And though an early October start to the holiday shopping season may have contributed to less robust consumer spending in November compared with October, economists see price pressures playing a role.

“Consumer spending rose a moderate 0.6 percent m/m last month, entirely led by services outlays. But inflation continues to take a bite out of consumers’ wallets as real spending was disappointingly flat when adjusting for higher prices,” said Kathy Bostjancic, chief US financial economist at Oxford Economics.

The PCE data was expected to be blistering after the US Department of Labor reported earlier this month that the Consumer Price Index rocketed 6.8 percent in November – also the sharpest increase in nearly 40 years.

For most of this year, the Federal Reserve has tolerated rising levels of inflation to prioritise getting Americans back to work.

But this year’s price increases caused by supply chain snarls, and shortages of raw materials and workers stemming from pandemic disruptions have proved more persistent than the Fed originally expected.

Moreover, though the labour market has yet to recover all the jobs it lost to last year’s pandemic lockdowns, the unemployment rate is rapidly closing in on its pre-pandemic level of 3.5 percent. The US economy currently has a near-record number of job openings. And American workers feel so confident about their job prospects that they are saying “I quit” in near-record numbers.

Economists have been scratching their heads over what is behind the US worker shortage, but factors ranging from fear of contracting COVID-19, to baby boomers taking early retirement, and workers unlocking their entrepreneurial spirits to start businesses of their own are believed to be factors.

Faced with a labour market awash in jobs going begging and inflation partying like it’s 1982, the Fed this month signalled its intention to pivot monetary policy to start reining in price pressures.

At the end of its final policy-setting meeting of the year, the Fed said it would accelerate the unwinding of pandemic stimulus measures and it released fresh projections calling for three interest rate increases next year.