Wages, prices and consumer spending all continued to rise, the latest government data showed Friday – new indications that the economy remains resilient despite fears of a recession, but also that inflation is likely to remain an annoying problem for the Federal Reserve.
Consumer prices rose 6.8 percent over the year through June, according to the Fed’s Preferred Inflation Index Personal consumption expenses measuring unit. That was the fastest pace since 1982. However, consumer spending grew even faster than prices, as Americans spent money on cars, vacations and restaurant meals, while higher gas and grocery bills put pressure on household budgets.
Meanwhile, wages grew briskly, albeit not enough to keep up with inflation. The Employment Cost Index for the second quarter it rose 5.1 percent from a year earlier.
All things considered, data released Friday indicated that the consumer economy has maintained momentum despite the highest inflation rate in decades. That should allay concerns that an economic downturn has already started, but paradoxically it could also make future economic pain more likely: strong demand will put continued upward pressure on prices, forcing the Fed to react more aggressively to lower prices. cool demand and get inflation under control.
Central bank officials on Wednesday made their second supersize interest rate hikes in a row – three-quarters of a percentage point – as they try to slow the economy by making money more expensive to borrow. They have indicated that they will be keeping a close eye on incoming economic readings as they consider whether to take another big step at their next meeting in September, and a number of economists said Friday’s data would likely spur officials to take decisive action. decisive action.
“This is a printout that will keep Fed officials up at night,” Omair Sharif, founder of Inflation Insights, wrote in response to the new wage data. “The monthly inflation and activity data will have to work together in a very big way for the Fed to step down.”
Fed chairman Jerome H. Powell said at his press conference this week that officials could raise interest rates by three-quarters again, though he made no such commitment. The Fed has nearly two months and a lot of economic data to analyze between now and its next rate decision.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in an interview Friday that a half-point hike in interest rates at upcoming meetings “seems reasonable” to him. But he noted that inflation data had been surprising “in a bad way” and said that if core inflation remained high, it might lead him to think a three-quarter point move was needed.
“It remains a concern,” Mr Kashkari said of the data released Friday. “I’m waiting for good news to come: some surprises that, oh, inflation was lower than we expected.”
As rapid price increases challenge the Fed, they are also following the White House, which called Friday’s inflation numbers “too high.”
What the Fed’s rate hikes mean for you?
A toll on borrowers. The Federal Reserve has raised the Federal Funds rate, its main interest rate, as it tries to… keep inflation in check. By raising interest rates, which is what banks charge each other for overnight loans, the Fed creates a ripple effect. Directly or indirectly, a number of borrowing costs for consumers will increase.
“The president will continue to do everything in his power to address inflation and work with Congress to lower prices,” Cecilia Rouse, chair of President Biden’s Council of Economic Advisers, said in a statement. after publication.
Gas prices have fallen sharply this month, which should pave the way for slower inflation in July data. But it’s not clear how sustainable those changes will be, and there are plenty of other worrying signs about the inflation outlook.
Prices have been rising rapidly for over a year and central bankers are trying to curb demand and lower inflation before it takes hold. Once consumers and businesses begin to expect and accept ever-increasing costs, it can be harder to destroy them: workers could start asking higher wages to cover their higher costs, and companies could start steadily raising prices to meet their rising costs. cover labor costs in an upward spiral.
Most economists think America isn’t there yet, but wage growth has accelerated — likely to a point that would make it difficult for price hikes to return to the Fed’s 2 percent inflation target. It is unlikely that companies will stop raising prices when their labor costs soar.
That’s why Friday’s Employment Cost Index data is problematic for the Fed. The report wages and salaries measure rose 5.3 percent from a year earlier before adjusting for inflation, notably up 4.7 percent in the previous reading. Private wages and salaries rose an even stronger 5.7 percent.
While there was some moderation in benefits – and a measure of wages and benefits for workers not receiving incentives slightly relaxed — the report as a whole suggested that employers paid while trying to retain employees and attract new ones in a job market with many vacancies.
And the details of the inflation report made it clear that price pressures remained strong. A core inflation measure, which takes out volatile food and fuel prices to get a sense of underlying inflation trends, slowed month-on-month. That reversed in June: prices rose 0.6 percent from the previous month, the fastest reading in more than a year, and up 0.3 percent in May.
After waiting in vain for more than a year for inflation to peak, economists are looking to consumer spending for a signal of when, and how much, it might eventually moderate.
Analysts have been predicting for months that consumers will eventually be unable to keep up with rising costs, prompting them to slow their spending so much that it weighs on demand and overtakes supply.
May’s spending report had suggested the slump could begin, but buyers made a comeback in June. Total spending rose 1.1 percent, slightly faster than the monthly consumer price increase of 1 percent.
“Airplanes and trains are overbooked, hotels are nearly full and leisure groups are reporting very strong demand indicating they are willing to spend money in the summer,” Greg Daco, chief economist at EY-Parthenon, wrote after the release.
Strong demand for cars, fitness equipment and physical goods has contributed to prices rising over the past year. Policymakers hoped that, as the pandemic eases, consumers will return to spending on services, helping supply chains catch up and slowing inflation.
However, that transition has been slow. Expenditure on services rose in June, but so did expenditure on goods, even adjusted for inflation. Spending on cars and auto parts rose 2.5 percent in June, after falling in May.
“We had this story in the year where consumption would shift from goods to services, but consumers continued to spend” on goods, said Blerina Uruci, an economist at T. Rowe Price.
Still, incomes grew more slowly than prices in June, with consumers compensating for this by saving at the lowest rate since 2009 – a trend that will not be sustainable in the long run. And there are other reasons to think that both price growth and spending will soon burst.
Have plane tickets has decreased this month, economists said, which should put some pressure on inflation in July, showing the broader economy some signs of cooling down. Used cars, which have been in short supply for more than a year and have been a major factor in inflation, are finally returning to some car sales as demand for used vehicles dwindles.
“In our split economy, used vehicle buyers are more likely to be more negatively impacted by higher energy, food and rent prices,” Jonathan Smoke, chief economist at Cox Automotive, wrote in a research note this week.
Major retailers including Walmart has noted: that consumers buy less goods because they pay more for food and their budgets come under pressure.
And some data points suggest the economy is already in trouble. The economy slumped for the second straight quarter after taking inflation into account, data released Thursday shows, which is a common but unofficial definition of a recession.
But those signals are far from convincing. That GDP data will be revised, and many economists warned against reading too much into it as job growth remains robust.
As they parse conflicting economic signals, investors are watching the Fed closely, trying to guess how much it could raise interest rates during its September 20-21 meeting and what it makes of a slowdown.
“I don’t think the country is in recession, but at some level that’s not the right question. I think the right question is whether the current economic conditions are causing problems,” said Raphael Bostic, the president of the Federal Reserve. Bank of Atlanta. , said in a NPR interview published Friday morning. “There are a lot of people who are in pain, and that’s why we really need to tackle the high inflation.”