Inflation fears were rekindled on Friday when the Federal Reserve’s preferred measure printed its hottest reading in 29 years, and economists warn higher prices could persist for some time.
Basic personal consumption spending, which excludes food and energy, rose 3.1% annually in April, according to a report released by the Bureau of Economic Analysis on Friday. The 1.2 percentage point increase from last month’s 1.9% reading was the largest since record keeping began in 1960.
On a monthly basis, prices increased 0.7%.
The strong impression “will keep the inflation chatter going longer,” said Anu Gaggar, senior global investment analyst for Commonwealth Financial Network.
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Supply chain disruptions and labor shortages caused by COVID-19 have resulted in demand exceeding supply, pushing prices up.
Key products like semiconductors are scarce after production was temporarily halted due to lockdowns aimed at slowing the spread of COVID-19.
These problems have been exacerbated by labor shortages that have arisen in industries due to generous unemployment benefits which mean that many workers are better paid to stay at home.
Federal officials see price pressures as transitory.
“There’s just going to be a streak of these temporary factors that are going to linger until the end of this year,” said Mary Daly, president of the Federal Reserve Bank of San Francisco, in an interview with Bloomberg News.
She expects the price pressures to ease in 2022 as supply chains are restored and the baseline effect issues of comparing the pandemic-induced pandemic have diminished with the. the rebound that followed.
Other Fed officials also argued that the price pressures would likely be temporary, allowing the central bank to keep interest rates near zero.
“We agree that most of the pressures are transient, but the imbalance between supply and demand may take some time to resolve,” Ethan Harris, global economist at Bank of America, wrote ahead of Friday’s report.
Harris fears that aggregate demand growth will remain very strong in the coming quarters, which means that an increase in supply will be needed to restore the imbalance.
This could prove difficult as supply chain and workforce issues show no signs of improving. Chipmakers, for example, have warned that the shortages could last for another two years.
In addition, labor shortages are likely to last until at least September, when supplementary unemployment benefits expire. The Biden administration has yet to attempt to expand them.
But not everyone is worried about lingering inflationary pressures.
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David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research, says core inflation is spinning at about 2%, the Fed’s target, given the distortions caused by the pandemic.
“That’s why the Fed doesn’t hyperventilate like everyone else,” he said.