WASHINGTON — Inflation rose in June and workers’ average wages accelerated in the spring — signs that Americans will soon feel no respite from rising prices and the Federal Reserve will feel compelled to raise borrowing costs further.
The closely-tracked inflation gauge by the Fed jumped 6.8% in June from a year earlier, the government said on Friday, the biggest such jump in four decades. Most of the increase was driven by energy and food.
Even on a month-to-month basis, prices rose 1% in June, the biggest such increase since 2005. Even excluding volatile food and energy categories, prices climbed 0.6% from May to June.
Salaries of employees excluding government employees jumped 1.6% in the April-June quarter, matching the record high of the previous decline. Higher wages fuel inflation if companies pass their high labor costs on to their customers, as they often do.
Friday’s figures underscore the persistence of inflation that is eroding Americans’ purchasing power, undermining their confidence in the economy and threatening Democrats in Congress in November’s midterm elections.
Some signs indicate that some ranges of inflation may ease in the coming months, though not by much: According to the AAA, gas prices have fallen from an average national peak of $5 to $4.26 since mid-June. Similarly, prices of other commodities have declined for commodities such as wheat and copper.
But the more frequent drivers of inflation, if any, show little evidence of slowing down. Wage data released Friday – a measure known as the Employment Cost Index – indicated that paychecks were still growing at a strong pace. This is good for workers, but it could raise concerns at the Fed about its effect on prices. Chair Jerome Powell specifically cited the measure as a concern for central bank policymakers during a news conference on Wednesday.
“This is one (report) that’s going to keep Fed officials up at night,” said Omair Sharif, president of Inflation Insights.
The government also reported on Friday that consumer spending managed to surpass inflation last month, rising 0.1% from May to June. Spending indeed jumped, but most of the gains were wiped out by higher prices.
Rising consumer demand for services such as airline tickets, hotel rooms and restaurant meals is still helping fuel inflation. However, many retail and consumer goods chains say inflation is squeezing buyers and limiting how far their money goes – a sign that consumer spending may be weakening further.
This week, Walmart said its profits would decline as its customers are spending more on expensive food and gas, leaving them unable to buy clothing and other discretionary goods. Similarly, Best Buy downgraded its sales and profit forecasts because rising inflation has forced consumers to reduce their purchases of electronics devices.
Inflation is rising so fast that despite wage increases for many workers, most consumers are falling behind with rising cost of living.
High inflation and interest rates are also hampering the US economy, which shrank for the second straight quarter in the April-June quarter, raising fears of a recession. Two quarters of declining growth follows an informal rule when a recession begins, although strong recruitment suggests the economy still maintains pockets of strength and is not yet in recession.
On Wednesday, the Fed raised its benchmark interest rate by three-quarters for the second time in a row in its most aggressive campaign in more than three decades to tame high inflation. Powell indicated that the Fed could raise rates with small increments in the coming months.
Nevertheless, he also emphasized that the Fed’s policymakers consider the fight against inflation their top 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 remains high.
By raising lending rates, the Fed makes it expensive to take out mortgages or auto or business loans. The goal is for consumers and businesses to borrow, spend, and pay less rent, thereby cooling the economy and slowing inflation.
Globally, inflation is taking a toll on other economies as well. This month, prices rose 8.9% in 19 European countries that use the euro currency a year earlier. Europe’s economy has been particularly badly hit by high natural gas and oil prices resulting from Russia’s invasion of Ukraine, although it managed to grow slightly in the second quarter.
The Fed monitors Friday’s inflation gauge, called the Personal Consumption Expenditure Price Index, even more closely than it does the government’s better-known consumer price index. Earlier this month, the CPI reported a rise in inflation to 9.1% in June from a year ago, the highest in nearly 41 years.
The PCE index reflects lower inflation levels than the CPI. Fares growing at their fastest rate in 35 years are given less importance in PCE than in CPI.
The PCE price index also takes into account changes in the way people shop when inflation rises. As a result, it can capture, for example, when consumers switch from pricey national brands to cheaper store brands.