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The Fed’s Favorite Price Index Rose 4 Percent. What Comes Next?

The Fed’s Favorite Price Index Rose 4 Percent. What Comes Next?
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The Fed’s Favorite Price Index Rose 4 Percent. What Comes Next?

The Fed’s Favorite Price Index Rose 4 Percent. What Comes Next?

The Federal Reserve’s preferred measure of inflation rose 4% in June from a year earlier, as the rebounding economy and strong demand for goods and services helped push prices up.

The gains in the personal consumption expenditure inflation index were the fastest since 2008, but in line with economists’ expectations. This rapid pace should not last – and to what extent and how quickly it will fade is the economic question of the moment.

Inflation has been surprisingly rapid this year. Economists knew the prices would show big increases because they were measured against the weak 2020 numbers, when the costs of many everyday purchases plummeted. But the jump was more intense than expected.

This is in part because supply bottlenecks have arisen in the reopening US economy. Computer ship shortages pushed up electronics prices and delayed auto production, causing used car prices to soar as people scrambled to find vehicles. Employers are struggling to rehire workers quickly enough to meet the return demand, and wages and prices at restaurants and some other service providers have started to rise.

Spending remains strong, the press release on Friday also showed, increasing 1% in June from last month. That was more than the 0.7% pop economists in a Bloomberg survey had expected, and after adjusting for inflation, it was still up 0.5%.

Even if consumer demand holds, June’s inflation data could be a culmination of the price pressure saga. The weak figures from last year are becoming less of a factor, and many economists expect the rapid pace of price increases to begin to moderate in the coming months. A skyrocketing increase in used vehicle prices, which was large enough to drive up overall prices, showed signs of slowing down in July.

Yet how quickly inflation will fall back to the Fed’s 2% target, which it tries to reach on average over time, is increasingly uncertain. It’s unclear how quickly the supply chain grunts that have complicated the pricing situation so far this year will dissipate, or if new ones will emerge. The escalation of coronavirus cases around the world and the emergence of new variants, like Delta, could lead to continued disruptions in global production and shipping routes, ones that will arrive just in time for the start of the school year and the season. holiday shopping.

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“The problem with the Delta variant is that the factors that reduce the supply of goods and labor are lengthened and persist,” said Constance L. Hunter, chief economist at the accounting firm KPMG. “This extends many of the components of the pandemic that caused inflation. “

Michael Patrick, a chef and restaurateur in Memphis, had to increase the salaries of cooks and dishwashers to entice them to return to his upscale Southern restaurant, Rizzo’s by Michael Patrick. Its food costs have also increased due to supply chain issues that have made it difficult to obtain chicken and other key ingredients. He therefore reacted by increasing menu prices twice in recent months. So far, its customers are not complaining.

“People don’t even blink,” he said. “No one said to me, ‘I can’t believe you raised the price of meatloaf by two dollars.’ “

But Mr. Patrick is worried about the effects of the Delta variant. He and his customers have learned to navigate pandemic life, he said, so he’s confident he can keep sales going. But if the resurgence of the virus leads to more closures of meat processing plants and other food producers, it could pose a greater challenge.

“Canola oil, beef, chicken – it’s all going up because the supplies just weren’t there,” he said. “I hope that in the end, these variations will not encourage many of these companies to close their doors again. “

How quickly today’s robust price gains fade will be important to workers. Rising prices are eating away at workers’ paychecks. Profit after tax fell 0.5% in June, which explains the impact of inflation. Over the past year, inflation has more than offset a modest increase in after-tax income.

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Data released on Friday showed core inflation, which excludes food and volatile fuels and can give a more accurate reading of price trends, rose 3.5% in June from a year earlier. , for the highest annual reading in 30 years.

The overall index climbed 0.5% from May to June, slightly less than economists 0.6% in a Bloomberg survey had expected.

The new inflation data, released by the Commerce Department, comes out later than a separate Labor Department inflation report. But they’re closely watched as the Fed uses the Personal Consumption Expenditure Index – which tracks things people consume but don’t pay directly, like medical care – to gauge progress toward its inflation target.

“The US economy surprised us all,” James Bullard, Federal Reserve Chairman of St. Louis, said in a speech on Friday. “A little inflation, a lot more than we’ve known historically – of course we expect it to moderate, but I don’t think it’s going to moderate completely in 2022.”

The Fed is ready to look at inflation it expects to be temporary, but would be concerned if it saw rapid price gains turn into a more sticky situation. Officials are particularly watching trends such as rising wages to see if the price hikes will last.

Wages and salaries rose 0.9% in the second quarter, slightly slower than in the first three months of the year, according to separate data released by the Labor Ministry on Friday. But wages are rising rapidly in some industries that are reopening as the pandemic subsides: wages in the leisure and hospitality sector rose 2.8% in the second quarter and 6.1% in the last. year.

If wage increases were to turn into a cycle – a cycle in which workers routinely ask for more money to cover rising costs and employers grant increases but pass on expenses – it could lead to persistent inflation down the road. Fed officials generally don’t think this is happening right now.

“There is a form of wage inflation that can lead to price inflation, and we are not currently seeing it,” central bank chairman Jerome H. Powell said at a press conference on Wednesday.

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Mr Powell and many of his colleagues have argued that price pressures should ease as the economy returns to normal – Mr Bullard is one of the Fed officials most concerned about the inflation. Many central bankers point out that although inflation has peaked in recent months, consumer expectations for future inflation remain at historically normal levels.

White House economists insisted on similar points and argued that high inflation was not a reason to lower their political ambitions, which they said would not add to price pressures. The Biden administration is trying to get Congress to pass a $ 1,000 billion bipartisan infrastructure bill, which includes $ 550 billion in new spending to make large-scale investments in transit and construction public across the country.

But Republicans have seen rising inflation as a poignant way to criticize the Biden administration, which they say is mismanaging the economic reopening and allowing prices to gallop uncontrollably.

“There is no doubt that we have serious inflation right now,” Senator Patrick J. Toomey, a Republican from Pennsylvania, said in an interview with CNN last week. “There is a question as to how long this lasts. And I’m just worried there is a high risk that it will be with us for a while. “

Even some central bankers are becoming suspicious as inflation rises.

“The risk to inflation is that it does not fall back as quickly as we had hoped, or that we suffer some other kind of shock that would send inflation even higher in 2022,” Bullard said on Friday. , saying the central bank should start slowing down its big bond buying campaign, so it can end this “taper” early next year and be ready to raise interest rates if necessary .

“It’s not that we have to take off earlier,” he said. “But we would like to have the option.”

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