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Butler County's great daily newspaper

A key inflation gauge rose 5.8% in 2021, most in 39 years

WASHINGTON — A measure of prices that is closely tracked by the Federal Reserve rose 5.8% last year, the sharpest increase since 1982, as brisk consumer spending collided with snarled supply chains to raise the costs of food, furniture, appliances and other goods.

The report Friday from the Commerce Department also said that consumer spending fell 0.6% in December, with purchases of cars, electronics and clothes declining. Higher prices might have discouraged some shoppers, along with a wave of omicron cases that kept many Americans from traveling, eating out or visiting entertainment venues.

At the same time, incomes rose 0.3% last month, providing fuel for future spending.

Stubbornly high inflation has hammered household budgets, wiped out last year’s healthy wage gains and posed a severe political challenge to President Joe Biden and Democrats in Congress. It also led the Federal Reserve to signal Wednesday that it plans to raise interest rates multiple times this year beginning in March to try to get accelerating prices under control.

Excluding the volatile food and energy categories, so-called core prices rose 4.9% last year, the biggest increase since 1983. That was up from a 4.7% year-over-year rise in core prices in November.

From November to December, prices rose 0.4%, down from a 0.6% increase from October to November. Core prices rose 0.5% for a second straight month.

The economy is expanding at its fastest pace in decades, and job creation reached a five-decade high last year. But the rebound occurred so quickly after the pandemic shutdowns that it left many companies flat-footed, with fewer workers and supplies than they needed.

Besides raising interest rates, Chair Jerome Powell said Wednesday that the Fed will move to shrink its huge $8.9 trillion of bond holdings this year, another step that will likely tighten credit, slow spending and potentially weaken the economy.

Speaking at a news conference, Powell acknowledged that inflation has gotten “slightly worse” in the past month. He cautioned that higher prices “have now spread to a broader range of goods and services,” after initially affecting sectors of the economy, like factory-made products for homes, that were most disrupted by the pandemic.

The inflation figure that the government reported Friday is its personal consumption expenditures index. Though the consumer price index is a better-known barometer, the Fed tends to track the PCE in setting its interest rate policies. The PCE index tracks actual purchases consumers make each month, while the CPI follows a fixed market basket of goods.