Headline inflation gauge jumps 6.8% in June as prices continue to rise

The measure of inflation that the Federal Reserve closely tracks jumped 6.8% in June from a year ago, the largest annual increase in four decades.

Government figures released Friday underscore continuing inflation eroding Americans’ purchasing power, eroding their confidence in the economy and threatening congressional Democrats in the run-up to the November midterm elections.

On a monthly basis, prices rose 1% from May to June, faster than the 0.6% rise from April to May and the largest such jump since 2005.

“Consumer sentiment is definitely stinking, but Americans nonetheless continue to increase their spending,” Bill Adams, chief economist at Bank of Comica, said in response to the inflation figures released this morning.

A separate government report on Friday reinforced the fact that the economy remains under inflationary pressures. The measure of employee wages in the private sector jumped 1.4% in the April-June quarter, matching a record high hit last fall. Higher wages can fuel inflation if companies pass on higher labor costs to their customers, as they usually do.

The Fed is keeping a close eye on this report, known as the Labor Cost Index, and takes this into account in its interest rate decisions. The sharp increase in the index last fall contributed to the Fed’s shift in credit tightening.


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Consumers struggle to keep up

The government also said on Friday that consumer spending managed to outpace inflation last month, rising 0.1% from May to June after adjusting for price changes. Weak consumer spending, the main driver of the economy, in the face of rising inflation. But for now, it’s still helping fuel inflation, as demand remains strong for services, from airline tickets and hotel rooms to restaurant meals and cars.

“Even in the face of extraordinary inflation, consumers were confident enough to increase spending in June.”
Jeffrey Roach, chief economist at LPL Financial, said in an email, adding that many may access their savings accounts to do so.

“There’s a bad note on the income side,” Roach said. “Personal income growth in June was not keeping pace with inflation, so consumers turned to savings and credit to offset historical price hikes.”

Inflation was rising so quickly that despite the wage increases many workers received, Most consumers are lagging behind Frequency of cost of living expenses.

During the onset of the COVID-19 pandemic, the cash cushions of Americans grew as they holed up, hunkered down, and stopped spending money on dining out, travel and more. They also benefited from three rounds of stimulus checks, additional unemployment assistance and child tax credit payments.

Roach believes consumers have accumulated enough to get it through the year. “The high stock of savings should continue for a long time this year as consumers use this to offset ongoing price pressures,” he said.


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Shoppers are shrinking

Many retail and consumer goods chains say inflation is putting pressure on shoppers and limiting how far their money goes – a sign that consumer spending may weaken further.

Walmart said this week Profits will decrease Because their customers spend more on more expensive food and gas, which makes them less able to buy clothes and other discretionary items. Similarly, Best Buy lowered its sales and profit forecasts because rising inflation forced consumers to reduce their purchases of electronic devices.

Procter & Gamble, which makes Tide cleaners and Pampers, among many other consumer goods, said its customers are also limiting purchases after they spent more money in the spring.

Also, the high rates of inflation and interest rates hinder the American economy, which hinders the American economy Shrinked in the April-June quarter For the second consecutive quarter, heightening fears that the United States is in a recession. Despite this, two quarters of declining growth meet an unofficial rule that determines when the recession will start strong recruitment It indicates that the economy still has pockets of strength and that it has not yet entered a recession.

“Consumers drove fewer cars in June in the face of higher gas prices, and traded at the grocery store due to higher food prices,” said Adams of Bank of Comica.


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on Wednesday, and The Federal Reserve raised its benchmark The interest rate increased by three-quarters of a point for the second time in a row, in its strongest campaign in more than three decades to tame high inflation. Powell indicated that the pace of interest rate hikes by the Federal Reserve may slow in the coming months.

However, Powell stressed that Fed policy makers regard the fight against inflation as their top priority. He gave no hint that the weak economy could cause the Fed to slow or reverse its rate increases this year or early next if inflation remains high.

By raising borrowing rates, the Federal Reserve is doing it Get a more expensive mortgage Or a car or business loan. The goal is for consumers and businesses to borrow less, spend and hire, thereby cooling the economy and slowing inflation.

During the April-June quarter, US consumers increased their spending, even after adjusting for inflation. But the number was a meager 1% annual gain, down from 1.8% in the January-March period.

“As long as households continue to buy, the economy should avoid a recession,” PNC chief economist Gus Foucher said in a research note.

On Thursday, President Joe Biden dismissed any idea that a recession was beginning. Biden cited still-strong job growth, an unemployment rate near its lowest level in half a century, and a raft of investments from semiconductor companies as evidence that the economy remains in good shape.

Biden also welcomed the agreement that Senate Democrats drafted on a watered-down version of the Build Better legislation, which many economists say could slow inflation over time. The bill would cut the government’s budget deficit, curbing inflation by lowering aggregate demand. It would also reduce expenses for seniors by allowing Medicare to negotiate prices for some drugs.

The Fed tends to keep an eye on Friday’s gauge, called the PCE price index, even as it keeps a close eye on the government’s well-known CPI. Earlier this month, the CPI reported an acceleration in inflation, to 9.1% in June over the previous yearthe highest reading 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 for medical services covered by insurance or government programs. The CPI only covers out-of-pocket costs, which have risen further in recent years. Rents, which are rising at their fastest pace in 35 years, are given less weight in PCE than in the CPI.

The PCE price index also seeks to account for changes in how people shop when inflation jumps. As a result, it can pick up, for example, when consumers switch from expensive national brands to cheaper brands in stores.

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