WASHINGTON (AP) — A price measure closely tracked by the Federal Reserve rose 5.8% last year, the sharpest rise since 1982, when buoyant consumer spending collided with intricate supply chains to control the cost of groceries, furniture, appliances and other goods to raise.
Consumer spending fell 0.6% in December, with purchases of cars, electronics and clothing falling. Higher prices may have deterred some buyers, along with a surge in Omicron cases that have prevented many Americans from traveling, eating out, or visiting entertainment venues.
At the same time, incomes rose 0.3% over the past month, providing fuel for future spending.
Persistently high inflation has squeezed household budgets, wiped out last year’s healthy wage gains and presented a serious policy challenge to President Joe Biden and Congressional Democrats. It also led to the Federal Reserve signaling on Wednesday that it plans to try to contain rising prices from March this year.
Excluding the volatile food and energy categories, so-called core prices rose 4.9% last year, the fastest rise since 1983. That was up from a 4.7% year-on-year rise in core prices in November.
From November to December, prices increased by 0.4% compared to a 0.6% increase from October to November. Core prices rose 0.5% for the second straight month.
The economy is expanding at the fastest pace in decades, and job creation hit a five-decade high last year. But the recovery came so quickly after the pandemic shutdowns that many businesses were left flat-footed, with fewer workers and supplies than they needed.
In addition to raising interest rates, Chairman Jerome Powell said on Wednesday that the Fed would trim its massive $8.9 trillion in bond holdings this year, another move likely to limit lending, slow spending and possibly the economy will weaken.
At a news conference, Powell acknowledged that inflation had “worsened a bit” over the past month. He warned that higher prices “have now spread to a wider range of goods and services” after initially hitting sectors of the economy, such as manufactured household goods, that have been hardest hit by the pandemic.
Powell also said the Fed is increasingly focused on whether rising wages are acting as the primary driver of inflation, forcing companies to charge more to cover their higher labor costs. Such a “wage-price spiral,” not seen in the United States since the 1970s, can make it difficult to cool inflation.
A said workers’ salaries and benefits increased by 4% over the past year. It was the biggest increase in 20 years. Powell said a major increase in wages and benefits reported in November was a key reason the Fed began to shift policy towards higher interest rates. While rising wages are good for workers, they can also increase inflation if not offset by efficiency gains.
The inflation figure the government reported on Friday is the personal consumption spending index. Although CPI is a better known barometer, the Fed tends to follow the PCE when setting interest rate policy. 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 was also at its fastest pace in nearly four decades.
Prices have skyrocketed over the past year as Americans have spent lavishly, helped by big spring stimulus checks and higher wages. Spending on cars, electronics and other goods rose 12% in 2021, the government reported on Wednesday, the biggest increase since 1946.
At the same time, bottlenecks in supply chains and shortages of components, particularly semiconductors, have left many retailers and car dealerships with fewer cars and other goods to sell. Powell has primarily blamed persistent “supply and demand imbalances” for inflation.
Higher food and paper product costs and the need to raise wages to attract and retain workers weighed on profits at a healthy pace on Thursday, even after prices rose 6% last year.
Likewise, Procter & Gamble announced last week that it would raise prices for laundry detergents like Tide, Gain and Downy, as well as personal care products. The company expects price increases for chemicals and other raw materials this year.
Higher prices could weigh on some Americans’ willingness to spend. Still, last month’s decline in consumer spending is likely to be temporary. Americans are already showing signs of returning to restaurants and movie theaters as the huge spike in Omicron infections begins to recede.
According to JPMorgan Chase, spending on its hotel, travel and entertainment credit cards has rebounded this month after declining in December. Spending has risen more sharply in states where COVID-19 cases have fallen the most.
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