One of the key inflation measures that the Fed uses, the core personal expenditures price index, rose a staggering 5.2% from last year. Which is the highest rise in inflation in the last 40 years. the rise in food and energy prices was a big part as they rose 6.1%.
Consumer spending was also a big part as it rose 2.1%, faster than the expected rate of 1.6%. This reversed the decline in December of 0.8%. This is somewhat surprising because personal income remained constant and real disposable income fell 0.5%. This increase in spending lowered personal savings by 6.4%, the lowest that it has been in almost a decade.
In order to combat this high rise in inflation, the Fed has come out and said that they will be raising interest rates as soon as March. However, due to the Ukraine conflict, the hike in interest rates is less likely by 50 basis points.
Inflation has also led to increases in salaries and wages. Rising 9.3% last year compared to the lower 1.3% the prior year. That influx of money has been a part of keeping inflation on the rise but also has kept the demand for goods high.
https://www.cnbc.com/2022/02/25/pce-inflation-january-2022-.html
I had theorized last month that unemployment levels would rise for 2 reasons: (1) We are below our natural rate of unemployment, and (2) the increase in wages. It is being forecasted, however, that they would drop, mainly due to the shrinkage of the labor force.
ReplyDeleteI find the fact that personal savings decreased by such a large amount quite interesting because I would have thought that COVID-19 would decrease people's propensity to spend. I also think that the interest rate dilemma will be solved by how bad we think the conflict will be. If we do not think that the conflict will be a long one, then the interest rates will likely rise.
ReplyDeleteWhile the Fed has stated that they will be increasing interest rates in March, I wonder how the conflict in Ukraine will effect their decision. The increase in inflation will continue to increase prices across the country, but now we must consider the increase in oil and natural gas prices. It will be interesting to see how consumers respond to the increase in prices.
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