The inflation rate that the Fed follows closely has reached its highest level since January 1982

The gauge of inflation that the Federal Reserve uses as its main measure jumped to its highest 12-month gain in more than 40 years in June, the Bureau of Economic Analysis reported Friday.

The PCE price index rose 6.8%, the largest 12-month move since the 6.9% increase in January 1982. The index rose 1% from May, posting its biggest monthly gain since February 1981.

Excluding food and energy, the so-called core PCE increased 4.8% from a year ago, up a tenth of a percentage point from May but from the most recent 5.3% rise recorded in February. On a monthly basis, the underlying rose 0.6%, its biggest monthly gain since April 2021.

Both core readings were 0.1 percentage point above the Dow Jones estimates.

Federal Reserve officials generally focus on core inflation, but have recently turned their attention to key numbers as well, with food and fuel prices soaring in 2022.

The BEA report also showed that personal consumption expenditures, a measure of consumer spending, increased 1.1% for the month, above estimates of 0.9% due in large part to the rise in prices. Real inflation-adjusted spending rose only 0.1% as consumers barely kept pace with inflation. Personal income rose 0.6%, beating estimates of 0.5%, but disposable income adjusted for inflation fell 0.3%.

Earlier this month, data showed that the CPI rose 9.1% from a year ago, the largest rise since November 1981. The Fed prefers personal consumption expenditures over CPI as a broader measure of inflation pressures. The consumer price index indicates the change in personal spending for urban households, while the personal consumption expenditure index measures the change in prices in goods and services consumed by all households, as well as non-profit organizations that serve families.

There was another bad inflation news on Thursday.

The employment cost index, another figure that federal policy makers closely watch, rose 1.3% in the second quarter. That represented a slight decrease from the 1.4% gain in the previous quarter, but was ahead of the estimate of 1.1%. Moreover, the 5.1% increase on a 12-month basis is a record for a series of data going back to the first quarter of 2002.

“The rest of the economy may slow, but wages are accelerating,” said Nick Bunker, director of economic research at job site Indeed. “Competition for workers remains fierce as employers have to continue to raise wages for new hires. Hot wage growth statistics may fade in the near term, but there is a long way for them to back off.”

The Fed is using a recipe for increasing prices and decreasing asset holdings to bring down prices, which have risen to their highest levels since the Reagan administration and helped cool consumer spending.

Ian Shepherdson, chief economist at Pantheon Macro Economics, said the 1.6% private sector wage gain for the quarter was “seriously disappointing” for the Federal Reserve.

The Fed follows the ECI numbers as they adjust for synthetic effects, or imbalances between earnings from high and low wage workers, as well as other factors.

“Wage gains at this pace are too high for the Federal Reserve, because it requires implausible rapid productivity growth in order to be consistent with its medium-term inflation target,” Shepherdson wrote.

Federal Reserve officials earlier this week approved a 0.75 percentage point straight increase in the central bank’s benchmark interest rate. Inflation was by any measure well above the Fed’s long-term target of 2%, and Chairman Jerome Powell said the central bank was “strongly committed” to lowering inflation.

In normal times, the Federal Reserve focuses on inflation except for food and energy costs because they are highly volatile and do not always reflect long-term trends. But Powell acknowledged on Wednesday that policy makers need to be aware of both types of inflation in the current environment.

“Core inflation is a better indicator of future inflation, and general inflation tends to be volatile. So, in normal times, you look through volatile movements in commodities,” he said. “The problem with the current situation is that if you have an ongoing period of supply shocks, they can actually start to undermine or act to decipher inflation expectations. The public does not distinguish between core and core inflation in their thinking.”

Markets expect the Fed to raise interest rates by another half a percentage point in September, according to CME Group’s FedWatch tracker. However, the probability of a larger increase of three-quarters of a point rose Friday morning to 38%.

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