Economic Report: Inflation rate hits 30-year high, PCE shows, as U.S. confronts major shortages

The rate of inflation in the 12 months ended in July edged up to 4.2% from 4%, biggest increase since the first Gulf War in 1991.)

Federal Reserve leaders insist inflation will fall back toward 2% once the economy returns to normal and widespread shortages of labor and materials fade away. The shortages have mostly been blamed for rising inflation.

The central bank wants inflation to average 2% a year in the long run, using the PCE gauge as its starting point. Yet senior Fed officials have recently acknowledged that high inflation might persist somewhat longer than they expected.

Read: Businesses still upbeat even as Delta deals small blow to the economy

Big picture: There’s no question inflation has soared this year, reversing a sharp decline early in the pandemic.

The big question is how quickly it fades and by how much. Some Fed critics worry the combination of very low interest rates and high government spending will keep inflation far above the Fed’s target well into next year and intensify the misery for consumers.

Yet most investors appear to have sided with the Fed. Bond investors, normally very sensitive to inflation, aren’t demanding higher returns. And the stock market is still setting new records.

Key details: A separate measure of inflation that strips out volatile food and energy prices rose 0.3% in July. 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%, keeping it at a 30-year high.

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.54%
and S&P 500
SPX,
-0.58%
were set to open higher in Friday trades.