WASHINGTON (AP) — An inflation gauge that is closely watched by the Federal Reserve jumped 6.8% in June from a year ago, the biggest increase in four decades, and leaving Americans no relief from soaring costs.
Friday’s government figures underscored 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.
A separate government report on Friday reinforced that the economy continues to grapple with inflationary pressures. A measure of wages for employees, excluding civil servants, jumped 1.6% 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.
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.
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 will plummet because customers spend more on more expensive food and gas, making them less able to buy clothes 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 has risen so rapidly that despite the wage increases many workers have received, most consumers are falling behind the pace of cost-of-living spending.
Inflation and high interest rates are also hampering the US economy, which contracted in the April-June quarter for the second consecutive quarter, heightening fears that a recession is looming. Two quarters of declining growth is an informal rule of thumb for the onset of a recession, although robust hiring suggests the economy still retains pockets of strength and is not yet in recession.
On Wednesday, the Fed raised 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 rein in 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 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 compared to the previous year. 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.
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.
On Thursday, President Joe Biden dismissed any notion that a recession had started. 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 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, to 9.1% in June from a year earlier, the highest of its kind 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 store brands.