Excluding the volatile food and energy prices, the inflation reading was 3.6%, where it has been since June. It remains the fastest so-called core inflation since March 1991 and is well above the Federal Reserve’s target of 2%.
The sustained spike in PCE inflation has led the Fed to signal that it will begin unwinding its emergency economic stimulus – although the US economic recovery has shown signs of slowing in recent months.
Salary increases and price increases
Although prices rose sharply, American incomes rose only at a modest 0.2%, or $ 35.5 billion. Disposable income rose even less – just 0.1%, or $ 18.8 billion.
These increases were partly due to higher wages as companies seek to attract and retain workers while labor shortages weigh on many companies. In state benefits, the American Rescue Plan’s child tax credit prepayments helped increase income. Friday’s report does not yet reflect the end of the expanded pandemic unemployment benefit, which was rolled out in early September.
Yet Americans kept going out to spend their money. Consumer spending rose 0.8%, or $ 130.5 billion, in August, split fairly evenly between goods and services.
“Households still have a lot up their sleeves with rising employment and wages, rising net worth (as house prices skyrocket) and massive excess savings,” said Sal Guatieri, BMO’s senior economist, in a statement to clients. “However, rising prices are draining purchasing power,” he added.
Consumers remain the backbone of the US economy. If inflation got so high that people would rather save their money than spend it, America’s economy would be in a really tight spot.
However, the savings rate skyrocketed during the pandemic. In August it was 9.4%.
Given the ongoing threat of new Covid-19 infections from the Delta variant and the colder months with fewer outdoor activities, people’s spending on services could be cut.