Inflation rose sharply in June and average workers’ wages accelerated in the spring – signs that Americans are unlikely to feel relief from rising prices anytime soon and that the Federal Reserve will feel compelled to raise borrowing costs further. (Gen J. Puskar, Associated Press)
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WASHINGTON — Inflation rose sharply in June and average workers’ wages accelerated in the spring — signs that Americans are unlikely to feel any relief from rising prices any time soon and that the Federal Reserve will feel compelled to raise borrowing costs further to increase.
An inflation gauge closely followed by the Fed rose 6.8% in June from a year earlier, the government said on Friday, the largest such jump in four decades. Much of the rise was driven by energy and food.
On a monthly basis, prices also rose 1% in June, the largest such increase since 2005. Even excluding the volatile food and energy categories, prices rose 0.6% from May to June.
Non-government wages rose 1.6% in the April-June quarter, hitting a record high set last fall. Higher wages tend to fuel inflation when companies pass on their higher labor costs to their customers, which they often do.
Friday’s numbers underscored persistent inflation, which is eroding Americans’ spending power, dampening their confidence in the economy and threatening congressional Democrats ahead of November’s midterm elections.
Some signs suggest that certain categories of inflation could weaken in the coming months, albeit not by much: According to the AAA, gas prices have fallen to $4.26 from an average national high of $5 since mid-June. The prices of other commodities such as wheat and copper have also collapsed.
But more persistent inflationary drivers are showing little, if any, sign of slowing. Payroll data released on Friday – a measure known as the employment cost index – showed paychecks were still growing at a robust pace. That’s good for workers, but it could raise concerns for the Fed about the impact on prices. Chair Jerome Powell specifically cited the move as a cause for concern among central bank policymakers during a news briefing on Wednesday.
“This is one (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 narrowly outpaced inflation last month, rising 0.1% from May to June. Expenses did skyrocket, but most of the profit was wiped out by higher prices.
Rising consumer demand for services like airline tickets, hotel rooms, and restaurant meals still helps fuel inflation. However, many retail and consumer goods chains say inflation is putting pressure on shoppers and limiting the reach of their money – a sign that consumer spending could weaken further.
This week, Walmart said its profits would fall because its customers are spending more on higher-priced groceries and gas, leaving them less able to shop for clothing and other discretionary items. Likewise, Best Buy lowered its sales and profit forecasts as rising inflation has forced consumers to scale back their electronics purchases.
Inflation has risen so rapidly that despite the wage increases many workers have received, most consumers are lagging behind the rising cost of living.
High inflation and high interest rates are also weighing on the US economy, which contracted for a second straight quarter in the April-June quarter, fueling fears of a looming recession. Two quarters of declining growth is an informal rule of thumb for the onset of a recession, although robust hiring suggests the economy is still strong and not yet in a downturn.
On Wednesday, the Fed raised interest rates by three-quarters of a point for the second straight day in its most aggressive attempt in more than three decades to tame high inflation. Powell signaled that the Fed could raise rates in smaller increments in the coming months.
However, he also stressed that Fed policy sees fighting inflation as its top priority. He gave no indication that a slowing economy would prompt the Fed to slow or reverse its rate hikes this year or early next year if inflation stays high.
By raising lending rates, the Fed is making it more expensive to get a mortgage, car loan, or business loan. The goal is for consumers and businesses to borrow, spend and hire less money, thereby cooling the economy and slowing inflation.
Globally, inflation is also weighing heavily on other economies. This month, prices in the 19 European countries using the euro currency rose by 8.9% year-on-year. The European economy was particularly hard hit by higher natural gas and oil prices following the Russian invasion of Ukraine, although it managed to grow slightly in the second quarter.
The Fed is monitoring Friday’s inflation gauge, called the consumer price index, more closely the government’s better-known consumer price index. Earlier this month, the CPI reported an acceleration in inflation to 9.1% yoy in June, the highest level in almost 41 years.
The PCE index tends to show a lower level of inflation than the CPI. Rents that are increasing at their fastest rate in 35 years are weighted less in the PCE than in the CPI.
The PCE price index also attempts to account for changes in people’s shopping behavior as inflation rises. For example, this can be used to record when consumers switch from expensive national brands to cheaper private labels.