A gauge of inflation that the Federal Reserve uses as its main barometer jumped in June to its biggest 12-month gain in more than 40 years, the Bureau of Economic Analysis reported Friday.
The personal consumption expenditure price index rose 6.8%, the biggest move in 12 months since a 6.9% rise in January 1982. The index rose 1% from in May, tying its biggest monthly gain since February 1981.
Excluding food and energy, so-called core PCE rose 4.8% from a year ago, up a tenth from May, but below the recent peak of 5.3% reached in February. On a monthly basis, the core rose 0.6%, its biggest monthly gain since April 2021.
Both core readings were 0.1 percentage points above estimates for the Dow Jones.
Fed officials generally focus on core inflation, but recently they have also turned their attention to headline numbers as food and fuel prices soar in 2022.
The central bank has been using a recipe of rate hikes and a reduction in asset holdings to reduce prices that have soared to their highest levels since the Reagan administration and helped cool spending of consumers
The BEA statement also showed that personal consumption expenditure rose 1.1% in the month, above the estimate of 0.9% and largely due to higher prices. Inflation-adjusted real spending rose just 0.1% as consumers barely kept pace with inflation. Personal income rose 0.6%, beating the 0.5% estimate, but inflation-adjusted disposable income fell 0.3%.
There was other bad inflation news.
The employment cost index, another number closely watched by Fed policymakers, rose 1.3% in the second quarter. That represented a slight decline from the 1.4% gain in the previous quarter, but beat the 1.1% estimate. Also, the 5.1% 12-month increase marked a record for a data series dating back to the first quarter of 2002.
“The rest of the economy might be slowing, but wages are accelerating,” said Nick Bunker, director of economic research at job site Indeed. “Competition for workers remains fierce as employers must continue to raise wages for new hires. These strong wage growth statistics may disappear in the short term, but there is a long way to go before they fall.”
Private sector wage gains of 1.6% in the quarter are “seriously disappointing” for the Fed, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The Fed tracks the ECI numbers because they are adjusted for composition effects, or imbalances between the earnings of higher- and lower-wage workers, as well as other factors.
“Wage gains at this rate are too high for the Fed, because they would require implausibly fast productivity growth to be consistent with the medium-term inflation target,” Shepherdson wrote.
Fed officials earlier this week approved a second consecutive 0.75 percentage point increase in the central bank’s benchmark interest rate. Inflation, by any measure, has been well above the Fed’s long-term goal of 2 percent, and Chairman Jerome Powell said the Fed is “strongly committed” to reducing inflation.
In normal times, the Fed focuses on inflation excluding food and energy costs because they are highly volatile and do not always reflect long-term trends. But Powell acknowledged Wednesday that policymakers need to keep an eye on both types of inflation in the current environment.
“Core inflation is a better predictor of inflation going forward, headline inflation tends to be volatile. So in normal times, you see volatile movements in commodities,” he said. “The problem with the current situation is that if you have a sustained period of supply shocks, they can start to undermine or work to unmoor inflation expectations. The public doesn’t distinguish between core inflation and headline inflation in their thought.”
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