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U.S. inflation rises sharply again in August and stays at 30-year high, PCE shows

The numbers: The cost of goods and services rose sharply again in August and left the rate of U.S. inflation at a 30-year high, with all signs pointing to price pressures snaking into next year.

The personal consumption expenditure price index climbed 0,4% in August, the government said Friday. It was the sixth straight big increase.

The rate of inflation in the 12 months ended in August edged up to 4.3% from 4.2% — the highest rate since 1991, when George H.W. Bush was president.

Until very recently, Federal Reserve leaders insisted inflation would start to fall back to toward pre-pandemic levels of 2% or less by the end of this year.

Yet in the past week senior central bank leaders acknowledged inflation could remain high well into 2022 because of ongoing shortages of crucial business supplies and and even labor.

Read: Powell says high inflation could last into next year due to shortages

The central bank wants inflation to average 2% a year in the long run, using the PCE gauge as its starting point.

Big picture: The highest rate of inflation in decades is squeezing families and businesses and acting as a bit of a drag on the economy. The big question is how long it lasts.

Most of the increase in inflation is tied to the full reopening of the economy. A huge burst of pentup demand overwhelmed the ability of businesses to keep up, especially with computer chips and other materials in short supply.

Faced with higher costs, businesses have raised prices, too. Thus the surge in inflation.

These shortages were expected to ease by now, but instead it looks like it could get even worse. Fed Chairman Jerome Powell said the shortages could last until next summer.

Also: The Fed has bet on a future of low inflation. Here’s what could go wrong

Key details: A separate measure of inflation that strips out volatile food and energy prices rose 0.3% in August. It’s known as the core rate and is viewed by the Fed as a more reliable weathervane for inflationary trends.

The increase in the core rate over the past 12 months was unchanged at 3.6%, but it was also at a 30-year peak.

The PCE index is viewed as a more accurate measure of inflation than the better known consumer price index. It tracks a broader range of goods and gives more weight to substitution — when consumers buy a cheaper product to substitute for a more expensive one.

Also on Friday, the government said consumer spending rose 0.8% in August. The increase was just half as big if inflation is taken into account.

Market reaction: The Dow Jones Industrial Average
DJIA,
-1.59%

and S&P 500
SPX,
-1.19%

were set to open in Friday trades.

For now most investors have bought into the Fed argument that high inflation is temporary. Bond yields have remained low and stocks aren’t far from a record high, though gains have been harder to come by lately.

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