Headache for Biden as Key Inflation Index Rises to 40-Year High

After the second consecutive negative gross domestic product (GDP) reading, there was further bad news for the Biden administration on Friday as a key measure of inflation rose to another high.

Inflation is Biden's "top economic priority," as the president remarked in June, and earlier this week he urged his colleagues to pass the Inflation Reduction Act, which he called "the strongest bill you can pass to lower inflation, cut the deficit, reduce health care costs, tackle the climate crises and promote energy security."

While the cost of living is a high item of concern, a July 28 Suffolk University/USA Today poll showed that "Abortion" is a higher priority for voters than "Inflation" by a 15 percent to 10 percent response rate. "Economy" was top, with 20 percent.

However, a CNN poll published earlier this month showed that nearly three-quarters of Americans (74 percent) disapprove of how Biden is tackling inflation, compared with 25 percent who approve.

Grocery shopping prices
President Joe Biden has said that inflation is the "top economic priority" for his administration. Above, a customer shops in a Kroger grocery store on July 15, 2022, in Houston, Texas. Getty Images

The PCE (Personal Consumption Expenditures) price index was 6.8 percent for June, up from 6.3 percent in May. As a measure of inflation, the PCE index is lower than Consumer Price Index (CPI), which came in at 9.1 percent in June.

The last time the PCE price index was 6.8 percent or higher was in January 1982, when it was 6.9 percent.

Analysts had been expecting year-on-year PCE to be 6.7 percent, according to data provider Trading Economics. The Federal Reserve Bank of Cleveland's nowcasting model of inflation had PCE at 6.77 percent, and core PCE at 4.69 percent.

For the American public, it might seem unhelpful to have two different measures of inflation, especially if they are going in different directions or are not particularly close in number. However, both are at historically high levels, and both show how consumers are being affected by inflation.

In 2012, the Federal Open Market Committee (FOMC) adopted PCE as its primary measure of inflation. According to the Federal Reserve, "The FOMC uses the PCE price index largely because it covers a wide range of household spending. However, the Fed closely tracks other inflation measures as well, including the consumer price indexes and producer price indexes issued by the Department of Labor."

As well as being more comprehensive, PCE is more flexible as it adjusts the basket weighting as people substitute more expensive products for less expensive alternatives. It also has more flexibility to make historical revisions. Overall, PCE is seen as more accurate, given that it is not reliant on consumer surveys like CPI and instead uses trade association data as well as other sources.

The other aspect of PCE that is important is the "core" measure that excludes food and energy. That index had dropped since February, going from 5.3 percent to 4.7 percent in May, but is now 4.8 percent in June. Although food and energy make up a large part of household spending, this measure of core inflation helps the Fed understand broader trends in inflation.

Michael Pearce, Senior U.S. Economist at Capital Economics, said in a note to Newsweek that: "Despite the levelling off and softening in some labour market indicators, the continued strength of wage growth makes it hard for the Fed to claim "clear and convincing" evidence that inflation is falling. We expect that will push officials to continue raising interest rates into restrictive territory over the coming months."