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A key inflation indicator rose 5.8% in 2021, the most in 39 years – The Denver Post

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A key inflation indicator rose 5.8% in 2021, the most in 39 years – The Denver Post

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By CHRISTOPHER RUGABER

WASHINGTON — A measure of prices that is closely tracked by the Federal Reserve rose 5.8% last year, the biggest increase since 1982, as buoyant consumer spending collided with strings of tight supplies to drive up the costs of food, furniture, appliances and other goods.

Friday’s Commerce Department report also said consumer spending fell 0.6% in December as purchases of cars, electronics and clothing declined. Higher prices may have discouraged some buyers, along with a surge of omicron cases that have kept many Americans from traveling, dining out or visiting entertainment venues.

Meanwhile, revenue rose 0.3% last month, fueling future spending.

Stubbornly high inflation has hammered household budgets, wiped out healthy wage gains over the past year and posed a stern political challenge to President Joe Biden and Democrats in Congress. It also led the Federal Reserve to signal on Wednesday that it plans to raise interest rates several times this year starting in March in an attempt to rein in accelerating prices.

With consumer spending likely remaining weak, economists expect growth to slow in the first three months of the year to an annual rate of 1.5% or less. That would be a drastic drop from a high rate of 6.9% in the last three months of 2021.

In another warning sign, a measure of consumer sentiment fell this month to its lowest level in more than a decade, the University of Michigan reported Friday. Consumers are particularly concerned that inflation will erode their income.

Still, economists say steady job gains and increased savings should eventually lead to more spending later this year, especially if the omicron wave continues to fade.

“You’re going to see the labor market continue to heal and, pandemic permitting, the consumer will have enough firepower to increase their spending at a reasonable pace as the year progresses,” said Joshua Shapiro, an economics economist. American chef at MFR Inc. .

Most analysts still expect inflation to decelerate this year, although it will likely remain elevated as rents and wages rise.

Excluding the volatile food and energy categories, so-called core prices rose 4.9% last year, the biggest increase since 1983. compared to the 4.7% year-over-year rise in core prices in November.

From November to December, prices rose 0.4%, down from a 0.6% increase from October to November. Core prices rose 0.5% for a second consecutive month.

The economy is growing at its fastest pace in decades and job creation hit its highest level in five decades last year. But the rebound happened so quickly after the pandemic shutdowns that it left many businesses stranded, with fewer workers and fewer supplies than they needed. Spending on automobiles, electronics and other goods jumped 12% in 2021, the government said on Wednesday, the biggest increase since 1946.

Along with raising interest rates, Chairman Jerome Powell said Wednesday the Fed will trim its huge bond portfolio by $8.9 trillion this year, another step that will likely tighten credit, slow spending and potentially weaken the economy.

Speaking at a press conference, Powell acknowledged that inflation had “worsened slightly” over the past month. He warned that the higher prices “have now spread to a wider range of goods and services”, having initially affected sectors of the economy, such as factory-made goods for homes, which have been the more disrupted by the pandemic.

Powell also said the Fed is increasingly focused on whether rising wages are acting as a primary driver of inflation, forcing companies to charge more to cover their labor costs. higher. Such a “wage-price spiral”, which the United States has not experienced since the 1970s, can make inflation difficult to calm.

A separate report on Friday provided signs of cooling on that front. The Labor Department said wages and benefits for workers jumped 4% last year. This is the largest increase in two decades. But over the past three months, the increase has slowed from 1.3% to 1% and has fallen even more for a category that includes restaurant and hospitality workers.

Powell said a sharp increase in wages and benefits, reported in November, was a key reason the Fed began to shift policy toward higher interest rates. While higher wages are good for employees, they can also drive up inflation if not offset by efficiency gains.

The inflation figure the government announced on Friday is its personal consumption expenditure index. Although the Consumer Price Index is a better known barometer, the Fed tends to follow the PCE in setting its interest rate policies. The PCE index tracks the actual purchases consumers make each month, while the CPI tracks a fixed basket of goods.

Earlier this month, the government said the CPI jumped 7% last year, also the fastest pace in nearly four decades.

A key inflation indicator rose 5.8% in 2021, the most in 39 years – The Denver Post

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