According to the Bureau of Economic Analysis, Friday’s June report showed that an inflation gauge used by the Federal Reserve as its main barometer saw the highest 12 month gain in 40 years.
The index of personal consumption expenditures prices rose 6.8%. This is the largest 12-month change since the January 1982 6.9% increase. It rose by 1% between May and tied its largest monthly gain since February 1981.
The core PCE (excluding food and fuel) increased 4.8% in comparison to a year earlier, an increase of one-tenth the percentage point over May but below February’s record of 5.3%. Core saw a 0.6% monthly increase, the largest gain in a month since April 2021.
The core readings of both were only 0.1 points higher than Dow Jones estimations.
Fed officials usually focus on core inflation. However, they have recently moved their attention to the headline figures as fuel and food prices continue to rise in 2022.
In addition, the BEA released that personal consumption expenditures rose 1.1% in the month. This is higher than the 0.9% estimate, and was largely due to an increase in prices. Inflation adjusted real spending rose by 0.1%, as inflation was barely catching up to consumers. While personal income increased 0.6% above the 0.5% figure, disposable income adjusted to inflation decreased 0.3%.
Data from earlier this month showed that the consumer price index experienced a 9.1% increase over a year, which was the largest gain since November 1981. As a wider measure of inflation pressures, the Fed prefers PCE to CPI. CPI measures urban household’s out-of-pocket spending changes, while PCE is a measure of price movements in all goods and services.
On Thursday, there was also bad inflation news.
In the second quarter, 1.3% was recorded in the employment cost index. This is another number Fed policymakers closely monitor. This was a slightly lower gain than the 1.4% in the prior quarter but still exceeded the 1.1% estimate. The 5.1% rise on a 12-month-basis was a new record in a series of data that dates back to 2002’s first quarter.
According to Nick Bunker (economic research director for Indeed), “the rest of the economy may be slowing down but wages are increasing rapidly.” Employers must continue to bid up wages in order to retain workers. “The competition for workers continues to be fierce.” Although these red-hot statistics on wage growth may be less relevant in the short term, they are still very likely to continue falling.
Fed officials have used a mix of rates increases and asset reductions to lower prices, which have shot up to the highest level since Reagan’s administration. This has helped to reduce consumer spending.
According to Ian Shepherdson chief economist of Pantheon Macroeconomics, the Fed’s quarter-end wage gains in the private sector were 1.6%.
Because the ECI numbers are adjusted for compositional effect, which is an imbalance between gains from lower-wage and higher-wage workers as well as other factors, the Fed follows them.
Shepherdson stated that wage gains of this magnitude are too fast for the Fed because it would need implausible high productivity growth to keep pace with inflation targets in the medium term.
Fed officials this week approved an additional 0.75 percentage points increase to the benchmark interest rate. The Fed has seen inflation rise by almost any measure, exceeding its 2% target for the longer term. Jerome Powell Chairman stated that the central banking is committed to keeping the price of inflation down.
Normal times the Fed will focus on inflation, excluding food costs and energy costs. These are volatile variables that don’t necessarily reflect long-term trends. Powell said Wednesday however that the Fed must pay attention to both forms of inflation.
Core inflation can be a more reliable predictor of future inflation than headline inflation, which tends to fluctuate. In normal times, one can only see volatility in commodity prices. “The issue with current circumstances is that supply shocks can be sustained and could actually begin to undercut or de-anchor inflation expectations. In their thinking, the public does not distinguish between headline and core inflation.
According to CME Group’s FedWatch Tracker, markets expect that the Fed will raise rates another half-point in September. On Friday, however, 38% was the likelihood of a three-quarter-point increase.