Inflation rose in June and average workers’ wages accelerated in the spring, signs that Americans are likely to feel no relief from rising prices at any time and that the Federal Reserve will feel compelled to further increase funding costs. (Gene J. Puskar, Associated Press)
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WASHINGTON – Inflation rose in June and average worker wages accelerated in the spring – signs Americans likely won’t feel any relief from rising prices anytime soon and the Federal Reserve will feel compelled to raise costs further financial.
A closely monitored inflation indicator by the Fed jumped 6.8% in June from a year ago, the government said Friday, the largest such leap in four decades. Much of the increase was driven by energy and food.
Also on a monthly basis, prices increased by 1% in June, the largest increase of this type since 2005. Even excluding the volatile categories of food and energy, prices increased by 0.6% from May to June.
Wages of employees, excluding civil servants, increased by 1.6% in the April-June quarter, equaling the record level reached last fall. Higher wages tend to fuel inflation if companies pass their higher labor costs onto their customers, as they often do.
Friday’s data highlighted the persistence of inflation that is eroding Americans’ purchasing power, undermining their confidence in the economy and threatening Democrats in Congress ahead of November’s midterm elections.
Some signs indicate that some categories of inflation may moderate in the coming months, albeit not by much: gas prices have fallen since mid-June from a national average high of $ 5 to $ 4.26, according to AAA. Likewise, the prices of other commodities, for items such as wheat and copper, have plummeted.
But more persistent factors than inflation show little, if any, evidence of a slowdown. Wage data released on Friday – a measure known as the labor cost index – indicated that wages were still growing at a rapid pace. This is good for workers, but it could raise concerns at the Fed about its effect on prices. President Jerome Powell specifically cited this measure at a press conference Wednesday as a source of concern for central bank policymakers.
“This is a (report) that will keep Fed officials awake at night,” said Omair Sharif, president of Inflation Insights.
The government also reported Friday that consumer spending managed to outrun inflation last month, rising 0.1% from May to June. Spending actually increased, but most of the gain was offset by rising prices.
Growing consumer demand for services, such as airline tickets, hotel rooms and restaurant meals, is still helping to fuel inflation. Many retail and consumer goods chains, however, say that 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 would drop because its customers are spending more on more expensive food and gas, leaving them less able to buy clothes and other discretionary items. Likewise, Best Buy downgraded its sales and profit forecasts because rising inflation forced consumers to cut back on their home appliance purchases.
Inflation has risen so rapidly that, despite the wage increases received by many workers, most consumers have lagged behind the rise in the cost of living.
High inflation and interest rates are also hampering the US economy, which shrank in the April-June quarter for the second consecutive quarter, intensifying fears of a looming recession. Two-quarters of the declining growth meets an informal rule of thumb for the onset of a recession, although robust assumptions suggest the economy still holds pockets of strength and is not yet in a recession.
On Wednesday, the Fed hiked its benchmark interest rate by three-quarters of a point for the second consecutive time in its most aggressive push in over three decades to tame high inflation. Powell warned that the Fed could hike rates in smaller hikes over the next few months.
However, he also stressed that Fed policymakers consider fighting inflation their top priority. He gave no hint that a weakening economy would cause the Fed to slow or reverse its rate hikes this year or early next year if inflation remained high.
By raising loan rates, the Fed makes it more expensive to take out a mortgage or a 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 is weighing heavily on other economies as well. This month, prices rose 8.9% in the 19 European countries that use the euro compared to the previous year. The European economy was particularly affected by the increase in natural gas and oil prices resulting from the Russian invasion of Ukraine, although it managed to grow slightly in the second quarter.
The Fed monitors the inflation indicator on Friday, called the Personal Consumer Spending Price Index, even more closely the government’s best-known consumer price index. Earlier this month, CPI experienced an acceleration in inflation, to 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, which are rising at the fastest pace in 35 years, have less weight in the PCE than in the CPI.
The PCE price index also tries to account for changes in how people shop when inflation rises. As a result, it can catch, for example, when consumers switch from expensive domestic brands to cheaper store brands.
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