US Fed's inflation measure posts biggest year-over-year increase since early 1990s

WASHINGTON - A key US inflation measure closely watched by the Federal Reserve in October posted its biggest year-over-year increase since the early 1990s amid supply chain bottlenecks, the US Commerce Department reported Wednesday.

The personal consumption expenditure (PCE) price index, the Fed's preferred inflation measure, jumped 5 percent in October from a year ago, the fastest annual pace since November 1990, according to the department.

The so-called core PCE price index that strips out volatile food and energy prices, rose 4.1 percent from a year ago, the fastest gain since January 1991, well above the Fed's inflation target of 2 percent.

"The record-high PCE deflator numbers will add to the pressure on the Fed as the market is pricing in a faster pace of tapering and an earlier start to rate hikes next year," Tuan Nguyen, US economist at accounting and consulting firm RSM US LLP, said Wednesday in an analysis.

"We expect an acceleration of tapering operations at the December meeting, which will open a door to an earlier-than-anticipated rate hike around December 2022. There is also the possibility of a rate hike as early as September," Nguyen said.

The Fed has pledged to keep the federal funds rate unchanged at the record-low level of near zero since the start of the pandemic. The central bank began last week to reduce its monthly asset purchase program of $120 billion by $15 billion. At this pace, the Fed would end its asset purchases by June next year.

While Fed officials "generally supported" the plan to reduce asset purchases by $15 billion a month, some Fed officials wanted a faster pace to give the central bank leeway to raise rates sooner, according to the minutes of the Fed's recent policy meeting released Wednesday.

"Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives," the Fed said in the minutes of its Nov 2-3 meeting, referring to the Fed's policy-making committee.

The minutes also showed that US inflation pressures could take longer to subside than Fed officials had previously assessed.

"They remarked that the Delta wave had intensified the impediments to supply chains and had helped sustain the high level of goods demand, adding to the upward pressure on prices," the minutes said.