The economic re-opening is coming alongside a surge in prices, but the U.S. central bank is making it clear that they will not flinch in the face of noisy inflation data.
The Bureau of Economic Analysts reported Wednesday that when stripping out more volatile pricing components like food and energy, prices rose by 1.8% year-over-year.
That change in core personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, is the fastest growth recorded since the beginning of the COVID-19 pandemic.
The reading could point to even higher inflation figures in coming months. After a third round of stimulus checks and other fiscal support, personal income surged by 21.1% in March. The data suggests that Americans will have more money in their pockets to spend more through the year, with the personal savings rate rising to 27.6%.
Analysts are now casting their predictions for just how high inflation could go, with Morgan Stanley’s economics team forecasting core PCE readings peaking at 2.6% in April and May.
ING economists said that as the re-opening gains momentum, households will choose to spend more money, particularly in service-based sectors like travel and leisure.
“With households having saved trillions of dollars, there is a lot of cash ammunition to fund it,” ING chief international economist James Knightley wrote Friday.
Fed not flinching
The Fed’s inflation target is 2%, meaning that core PCE growth of 1.8% is still below its target.
For the central bank, which watched inflation persistently undershoot its target through the last decade, the run up in prices is nothing to worry about — yet.
Fed Chairman Jerome Powell warned Wednesday that incoming inflation data would show higher numbers due to “transitory” factors. For example, year-over-year measures of inflation are now being compared against the spring 2020 months that showed the deepest contractions in economic activity.
Powell estimated that the so-called “base effects” will contribute about 0.7 percentage points to core inflation in April and May. The Fed also pointed to “temporary” supply chain bottlenecks.
“They carry no implication for the rate of inflation in later periods,” Powell told reporters Wednesday.
The Fed’s official stance is that it will tolerate inflation rising “moderately” above its 2% target, but Powell reassured markets that if prices look like they may run away, policymakers “will use our tools to guide inflation and expectations back down to 2%.”
Still, market watchers are unsure about the component of inflation that may not be temporary: the rebound in spending and demand in the face of unprecedented stimulus from the government and the Fed.
Savita Subramanian, Bank of America’s head of U.S. equity and quantitative strategy, said that the “million dollar question” is parsing out the temporary price pressures from the drivers that are not.
“It’s more about the Fed and how the Fed is able to absorb potentially higher inflation that might not be transitory,” Subramanian told Yahoo Finance Friday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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