A gauge of inflation closely watched by the Fed rose 6.8% in June from a year earlier, the government said on Friday, the biggest such jump in four decades. Most of the growth came from energy and food.
On a month-over-month basis, prices rose 1% in June, the largest increase since 2005. Even excluding volatile food and energy categories, prices rose 0.6% from May to June.
Wages for workers excluding state workers rose 1.6% in the April-June quarter, hitting a record high last fall. If companies pass on higher labor costs to their customers, as they often do, higher wages lead to inflation.
Friday’s numbers underscored the persistence of inflation, which is eroding Americans’ purchasing power, undermining their confidence in the economy and threatening congressional Democrats ahead of November’s midterm elections.
There are some signs that certain categories of inflation may moderate, if not significantly, in the coming months: According to AAA, gas prices have fallen from a national average of $5 to $4.26 since mid-June. Similarly, the prices of other commodities such as wheat and copper also fell.
But the more persistent drivers of inflation show little, if any, evidence of slowing. Payroll data released Friday — a measure known as the employment cost index — showed paychecks were still growing at a strong pace. That’s good for workers, but it could raise concerns about the impact on prices at the Fed. Chairman Jerome Powell cited the measure as a source of concern for central bank policymakers during a press conference on Wednesday.
“This is (a report) that will keep Fed officials up at night,” said Omair Sharif, president of Inflation Insights.
The government also reported on Friday that consumer spending rose 0.1% from May to June, outpacing inflation last month. Costs actually jumped, but most of the gains were wiped out by higher prices.
Increased consumer demand for services such as airline tickets, hotel rooms, and restaurant meals is still contributing to higher inflation. Many retailers and consumer goods chains say inflation is squeezing shoppers and limiting how far their money goes — a sign that consumer spending could weaken further.
This week, Walmart said its profits will decline as customers spend more on more expensive food and gas, and less access to clothing and other discretionary items. Likewise, Best Buy lowered its sales and profit forecasts as rising inflation forced consumers to cut back on electronics purchases.
Inflation has risen so fast that despite the pay increases many workers have received, most consumers are being left behind by the rising cost of living.
High inflation and interest rates are also weighing on the US economy, which shrank for a second straight quarter in the April-June quarter, fueling fears of a looming recession. Two-quarters of declining growth meets the unofficial rule of thumb when a recession begins, although strong hiring suggests the economy still maintains pockets of strength and is not yet in recession.
On Wednesday, the Fed raised interest rates by three-quarters of a point for the second time in its most aggressive move in more than three decades to tame high inflation. Powell hinted that the Fed could raise interest rates in smaller increments in the coming months.
However, he also emphasized that the Fed’s policymakers consider the fight against inflation as a top priority. He gave no hint that the weakening economy would cause the Fed to slow or reverse interest rate hikes this year or early next year if inflation remains high.
By raising interest rates, the Fed makes it more expensive to get a mortgage or car or business loan. The goal is for consumers and businesses to borrow, spend, and hire less, thereby cooling the economy and slowing inflation.
Globally, inflation has a heavy impact on other economies as well. This month, prices in the 19 European countries that use the euro currency rose by 8.9% compared to a year ago. Although the European economy managed to grow slightly in the second quarter, it was hit particularly hard by high natural gas and oil prices caused by Russia’s aggression in Ukraine.
The Fed tracks Friday’s inflation measure, called the personal consumer price index, even more closely than the government’s better-known consumer price index. Earlier this month, CPI reported an acceleration in inflation, reaching 9.1% in June from a year earlier, the highest in nearly 41 years.
The PCE index tends to show a lower level of inflation than the CPI. Rents, rising at the fastest pace in 35 years, weigh less in the PCE than in the CPI.
The PCE price index also tries to take into account changes in people’s shopping patterns when inflation jumps. As a result, it can, for example, capture consumers switching from expensive national brands to cheaper store brands. (AP) SCY SCY