Key inflation indicator jumps 6.8% in June as prices continue to climb

An inflation indicator closely watched by the Federal Reserve jumped 6.8% in June from a year ago, the largest annual increase in four decades.

Friday’s government figures underscore lingering inflation that is eroding Americans’ purchasing power, undermining their confidence in the economy and threatening Democrats in Congress ahead of November’s midterm elections.

Month-over-month, prices rose 1% from May to June, faster than the 0.6% rise from April to May and the biggest such rise since 2005.

“Consumer sentiment is certainly bad, but Americans continue to increase spending nonetheless,” said Bill Adams, chief economist at Comerica Bank, in response to the inflation figures released this morning.

A separate government report on Friday reinforced that the economy continues to grapple with inflationary pressures. A measure of wages for private sector employees jumped 1.4% in the April-June quarter, matching a record high set last fall. Higher wages can fuel inflation if companies pass on their higher labor costs to their customers, as they typically do.

The Fed closely monitors this report, known as the Employment Cost Index, and factors it into its interest rate decisions. The sharp rise in the index last fall contributed to the Fed’s policy shift toward tightening credit.

Consumers struggle to keep up

The government also reported on Friday that consumer spending managed to narrowly outpace inflation last month, rising 0.1% from May to June after adjusting for price changes. Consumer spending, the main driver of the economy, weakened in the face of high inflation. But for now, it’s still helping to fuel inflation, with demand still strong for services ranging from plane tickets and hotel rooms to restaurant meals and cars.

“Even in the face of extraordinary inflation, consumers were confident enough to increase spending in June,”
Jeffrey Roach, chief economist at LPL Financial, said in an email, adding that many could use their savings account to do so.

“A sour note is on the income side. Personal income growth in June did not keep up with inflation, so consumers dipped into savings and credit to offset the historic price rise,” he said. said Roach.

Inflation rose so rapidly that despite wage increases, many workers received, most consumers lag behind the pace of cost-of-living expenses.

At the start of the COVID-19 pandemic, Americans’ cash cushions grew as they hunkered down, sheltered in place, and stopped spending money on restaurants, travel, and more. They also received three rounds of stimulus checks, additional unemployment assistance and child tax credit payments.

Roach thinks consumers have accumulated enough to get through the year. “The high stock of savings is expected to last well into the year as consumers use it to offset lingering price pressures,” he said.

Buyers in a hurry

Many retail and consumer goods chains say inflation is squeezing shoppers and limiting the distance their money can travel, a sign that consumer spending could weaken further.

Walmart said this week that its profits would fall because its customers spend more on more expensive food and gas, making them less able to buy clothing and other discretionary items. Similarly, Best Buy lowered its sales and earnings forecasts as soaring inflation forced consumers to cut back on electronics purchases.

Procter & Gamble, which makes Tide detergent and Pampers, among many other consumer staples, said its customers are also moderating their purchases after spending more heavily in the spring.

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 the United States is in recession. The two quarters of declining growth meet an informal rule of thumb for the onset of a recession, although robust hiring suggests that the economy still retains pockets of strength and is not yet in a downturn.

“Consumers drove less in June in the face of rising gasoline prices and lowered grocery prices due to higher food prices,” said Comerica Bank’s Adams.

Wednesday, the The Fed raises its benchmark interest rate by three-quarters of a point for the second consecutive time, in its most aggressive campaign in more than three decades to tame high inflation. Powell signaled that the pace of Fed rate hikes may slow in the coming months.

Still, Powell pointed out that Fed policymakers see fighting inflation as 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 remained elevated.

By raising borrowing rates, the Fed makes 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.

In the April-June quarter, US consumers increased their spending, even after adjusting for inflation. But that figure was equivalent to a paltry 1% annual gain, down from 1.8% in the January-March period.

“As long as households continue to buy, the economy should avoid recession,” PNC chief economist Gus Faucher said in a research note.

On Thursday, President Joe Biden dismissed any notion that a recession had begun. Biden pointed to still solid job growth, an unemployment rate near a half-century low and a flurry of investment from semiconductor companies as evidence that the economy is still healthy.

Biden also welcomed an agreement forged by Senate Democrats on a slimmed-down version of his Build Back Better legislation, which many economists believe could slow inflation over time. The bill would reduce the government’s budget deficit, which dampens inflation by reducing aggregate demand. It would also reduce spending for seniors by allowing Medicare to negotiate the price of certain drugs.

The Fed tends to watch Friday’s indicator, 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 the previous yearthe highest such reading in 41 years.

The PCE index, which tends to show a lower level of inflation than the CPI, is a broader measure of inflation that includes payments made on behalf of consumers, including medical services covered by insurance or government programs. The CPI only covers personal expenses, which have increased more in recent years. Rents, which are rising at their fastest pace in 35 years, are also 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 private labels.