Over the past year, the United States has seen a surprising increase in the key federal inflation measure, according to data published in late April by the Commerce Department. The data indicates that in March, 2021, the personal consumption expenditures (PCE) price index, excluding volatile food and energy prices, rose 2.8% from the previous twelve months.
The PCE inflation measure, the Federal Reserve’s preferred inflation gauge, was expected to rise only 2.5% according to a survey by Dow Jones. This surprising sniff above the forecast indicates a significant rebound in pricing power after a pandemic-induced slump in 2020.
The wider PCE price index jumped 3.5% from a year ago, reflecting larger gains in goods and energy prices. Still, these increases were somewhat offset by a smaller increase in services prices. This broader measure ticked up more than anticipated, as Dow Jones had forecast a 3.3% increase.
The PCE index figures are significant because they are factored in by the Federal Reserve when deciding on monetary policy. This inflation data arrives amid an intense debate about the future direction of inflation in the United States. The central bank has signaled it will let inflation run above its normal 2% target for a short period to compensate for persistent low inflation in recent years.
The rise in March inflation is primarily attributable to base effects – since the prices dropped in early 2020 due to the COVID-19 pandemic, the year-over-year inflation readings will appear larger. Meanwhile, the economic recovery is making progress as the vaccine rollout continues at pace. However, some market participants are worried that the robust recovery combined with unprecedented fiscal and monetary stimulus could overheat the economy and lead to a persistent high inflation.
The inflation tension sits at the heart of the market’s stunningly mixed reaction to the Federal Reserve’s new framework. The U.S central bank announced last year that it would allow inflation to run moderately above its 2% goal for some time to ensure a robust recovery and achieve maximum employment.
This means that the Federal Reserve is unlikely to take action immediately in the face of the increased inflation readings. Instead, they are likely to monitor any changes very closely. Currently, the central bank views these inflation pops as temporary and expects them to settle down after volatile price decreases from 2020 fall out of the year-over-year comparisons.
In summary, the increase in inflation witnessed in March, 2021, is considered a temporary shift rather than a permanent one, serving more as a correction than a trend. As the year progresses, experts will keep a close watch on inflation measures, with the understanding that the impact of global events deeply influences the national economic landscape.