A key measure of inflation rose to a 31-year high in October

US price surges eased in the third quarter of the year. But they climbed to a more than 30-year high in October — showing the pandemic price hikes are clearly not behind us yet.

A deluge of economic data ahead of the Thanksgiving holiday highlights how the pandemic economy is still very much in flux.

A key measure of inflation stood at 5% over the 12-month period ended in October, the Bureau of Economic Analysis reported Wednesday. That was the highest level since November 1990.

Stripping out food and energy costs, which tend to be more volatile, prices rose 4.1% over the period, the most since January 1991.

Meanwhile, the same inflation gauge grew at annualized rate of 5.3% in the third quarter, the BEA reported earlier Wednesday morning. That compares with an increase of 6.5% in the second quarter. While that’s good news in principle, prices are still very high.

The Federal Reserve expects the elevated levels of inflation to stick around for a while before eventually abating as the supply chain bottlenecks and demand imbalances resolve themselves over time. That means even though inflation won’t disappear with a snap of a finger, the central bankers expect it will come down significantly next year, the meeting minutes of the Fed’s last get-together revealed Wednesday.

Wednesday’s data also updated the pace of US economic growth between July and September to 2.1% on an annualized basis, slightly less than economists had predicted. An initial report last month said the economy had grown at a rate of 2% last quarter. The little bump was due to strong consumer spending in spite of the high prices.

Even so the economy grew at a much weaker pace in the third quarter than in the three months before, when the pace of growth was 6.7%. Over the summer, the growing supply chain challenges, along with worries about the rapidly spreading Delta variant of the coronavirus weighed on the recovery.

Growth may have slowed over the summer, “but there is lots to give thanks for with a growth boom expected in the final quarter of the year,” said Chris Rupkey, chief economist at FWDBONDS LLC.

Economists expect that abating Delta worries, along with a faster pace of recovery in the labor market and rising wages, will make for a strong end to the year.

Spending into the holiday season

Even though prices are high, Americans can afford to spend their hard earned cash. At least for now. Concerns are brewing that inflation could rise to a level that will keep people from spending, which would be bad news for the recovery.

High prices have consistently shown up in measures of consumer sentiment and are weighing on how people feel about the economy.

The University of Michigan’s consumer sentiment tracker for November looked slightly better than an initial read of the data earlier in the month, but the message still remained the same:

“Consumers expressed less optimism in the November 2021 survey than any other time in the past decade about prospects for their own finances as well as for the overall economy,” and that was down to the high inflation, said Richard Curtin, chief economist of the Survey of Consumers, on Wednesday.

“Complaints about falling living standards doubled in the past six months and quintupled in the past year,” he added.

Survey participants expect their incomes to decline when adjusted for inflation, but for the holidays that won’t make a difference yet. The desire to have a “normal” holiday season is strong, according to Curtin, and accumulated savings will help Americans spend big this year in spite of higher prices.

Wednesday’s data also showed this trend: In October, incomes increased 0.5%, while disposable incomes rose 0.3%. That was up from September when incomes fell. Meanwhile, spending increased 1.3% in October.

The savings rate fell to 7.3%, the lowest level since December 2019.

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