Jun 28, 2021 - Economy

This could be peak inflation

Data: BEA via FRED Chart: Axios Visuals
Data: BEA via FRED Chart: Axios Visuals

The core PCE price index in May was increasing at the highest yearly rate since 1992. But this may be the top.

Why it matters: Core PCE, which was updated Friday, is the Federal Reserve's preferred measure of inflation. High inflation means your money is worth less, and it could force the Fed to tighten its easy monetary policy.

By the numbers: Core PCE rose to 3.4% in May from 3.1% in April.

  • It's currently above the Fed's target of an average 2% rate.

Yes, but: Core PCE rose by 0.5% on a monthly basis in May and down from 0.7% in April, suggesting price inflation may be decelerating.

  • And the Fed has argued elevated inflation has been driven by "temporary" factors like the low base effect from last year's drop-off due to the pandemic.

What they’re saying: "This should be the peak," according to a note from Pantheon Macroeconomics' Ian Shepherdson.

  • "The key question for the Fed ... is whether the spike in core inflation raises inflation expectations and whether employees have the power to translate higher inflation expectations into faster wage growth," he added.
  • Oxford Economics' Gregory Daco writes in a note that while he foresees "increased inflation stickiness, with core PCE inflation hovering around 3%" in the second half of the year, "we don’t foresee runaway inflation."

What to watch: The latest readings precede the summer months, where consumers are expected to spend more on services as they head out for vacation and trips — representing a much different stage of reopening not captured in May's data.

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