WASHINGTON (AP) — Inflation jumped in June and average worker wages accelerated in the spring — signs that Americans won’t. probably feel relief of rising prices anytime soon and that the Federal Reserve will feel compelled to raise borrowing costs further.
An inflation gauge closely monitored by the Fed jumped 6.8% in June from a year ago, the government said on Friday, the biggest such jump in four decades. Much of the increase is attributable to energy and food.
Also month-over-month, prices jumped 1% in June, the biggest such rise since 2005. Even excluding the volatile food and energy categories, prices rose 0.6% from May to June.
Wages for employees, excluding civil servants, jumped 1.6% in the April-June quarter, matching a record high set last fall. Higher wages tend to fuel inflation if companies pass on their higher labor costs to their customers, as they often do.
Friday’s figures underlined the persistence of inflation which is eroding Americans’ purchasing power, undermine their confidence in the economy and threatening Democrats in Congress ahead of November’s midterm elections.
There are some signs that some categories of inflation may moderate in the coming months, but not by much: Gasoline prices have fallen since mid-June from a national average peak of $5 to $4.26 , according to AAA. Likewise, the prices of other commodities, such as wheat and copper, have plunged.
But the more persistent drivers of inflation show little or no signs of slowing. Earnings data released on Friday – a measure known as the cost of employment index – indicated that paychecks continued to grow at a healthy pace. That’s good for workers, but it could raise concerns at the Fed about its effect on prices. Chairman Jerome Powell specifically cited the measure at a press conference on Wednesday as a source of concern for central bank policymakers.
“This is a (report) that will keep Fed officials up at night,” said Omair Sharif, chairman of Inflation Insights.
The government also reported on Friday that consumer spending managed to outpace inflation last month, rising 0.1% from May to June. Spending actually jumped, but most of the gain was wiped out by rising prices.
Growing consumer demand for services, such as airfares, hotel rooms and restaurant meals, is still helping to fuel inflation. Many retail and consumer goods chains, however, say inflation is squeezing shoppers and limiting the distance their money can travel – a sign that consumer spending could weaken further.
This week, Walmart said its profits would plummet because its customers spend more on more expensive food and gas, making them less able to buy clothing and other discretionary items. Likewise, Best Buy has lowered its sales and profit forecasts as soaring inflation has forced consumers to reduce their purchases of electronic devices.
Inflation has risen so rapidly that despite the wage increases many workers have received, most consumers are falling behind the rising cost of living.
Inflation and high interest rates are also hurting the US economy, which decreased in the April-June quarter for a second consecutive quarter, intensifying fears that a recession is looming. Two-quarters of declining growth responds to an informal rule of thumb for when a recession startseven though robust hiring suggests that the economy still retains pockets of strength and is not yet in recession.
On Wednesday, the Fed raised its key rate by three quarters of a point for the second consecutive time in its most aggressive campaign in more than three decades to bring high inflation under control. Powell signaled that the Fed may raise rates in small increments in the coming months.
Yet he also pointed out that Fed policymakers consider the fight against inflation as their first priority. He gave no indication that a weakening economy would prompt the Fed to slow or reverse its rate hikes this year or early next year if inflation remained elevated.
By raising borrowing rates, the Fed is making it more expensive to take out a mortgage, 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 also weighing heavily on other economies. This month, prices jumped 8.9% in the 19 European countries that use the euro a year earlier. The European economy was particularly hard hit by higher natural gas and oil prices resulting from Russia’s invasion of Ukraine, although it managed to grow slightly in the second quarter.
The Fed is watching Friday’s inflation gauge, called the personal consumption expenditure price index, even more closely than it tracks the government’s better-known consumer price index. Earlier this month, the CPI reported an acceleration in inflation, at 9.1% in June compared to a year earlier r, 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 their fastest pace in 35 years, are less weighted in the PCE than in the CPI.
The PCE price index also seeks to account for changes in the way people buy when inflation jumps. As a result, it can capture, for example, when consumers switch from expensive national brands to less expensive store brands.
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