The Federal Reserve’s primary measure of inflation jumped to a 12-month gain of more than 40 years in June, the Bureau of Economic Analysis reported Friday.
The personal consumption expenditures price index rose 6.8%, the largest 12-month move since a 6.9% increase in January 1982. The index rose 1% from May, tying its biggest monthly gain since February 1981.
Excluding food and energy, so-called core PCE rose 4.8% from a year earlier, up a tenth of a percentage point from May but hitting 5.3% 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 the Dow Jones estimate.
Fed officials usually focus on core inflation, but recently turned their attention to headline numbers as food and fuel prices soar in 2022.
A BEA release showed that personal consumption expenditures, a measure of consumer spending, rose 1.1% above estimates of 0.9% for the month, mostly due to rising prices. Real spending adjusted for inflation increased by only 0.1% because consumers did not keep up with inflation. Personal income rose 0.6%, topping estimates of 0.5%, while disposable income adjusted for inflation fell 0.3%.
Earlier this month, data showed the consumer price index rose 9.1% from a year earlier, the biggest gain since November 1981. The Fed prefers PCE to CPI as a broader measure of inflationary pressures. The CPI indicates the change in out-of-pocket expenses of urban households, while the PCE index measures the price change in goods and services consumed by all households, as well as non-profit organizations that serve households.
There was other bad inflation news on Thursday.
The employment cost index, another gauge closely watched by Fed policymakers, rose 1.3% in the second quarter. That represented a slight decline from a 1.4% gain in the previous quarter, but was ahead of estimates of 1.1%. Furthermore, the 5.1% increase on a 12-month basis marked a record for the data series going back to the first quarter of 2002.
“The rest of the economy may be slowing, but wages are accelerating,” said Nick Bunker, director of economic research at the job placement site. “Competition for labor remains fierce as employers have to bid up wages for new hires. These red-hot wage growth figures may fade in the near term, but they have a long way to go.”
The Fed has been using a recipe of rate hikes and reductions in asset holdings to bring down prices, which have risen to their highest levels since the Reagan administration and have helped cool consumer spending.
Private sector wage gains of 1.6% in the quarter were “seriously disappointing” for the Fed, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The Fed tracks ECI figures because they adjust for compositional effects, or imbalances between gains by high- and low-wage workers, and other factors.
“Wage gains at this pace would be too much for the Fed, as they would need unfathomable rapid productivity growth to be consistent with the inflation target over the medium-term,” Shepherdson wrote.
Fed officials earlier this week approved a second consecutive 0.75 percentage point hike in the central bank’s benchmark interest rate. Inflation by any measure is doing better than the Fed’s 2% long-term goal, and the central bank is “strongly committed” to keeping inflation down, Chairman Jerome Powell said.
In normal times, the Fed focuses on inflation excluding food and energy costs because they are very volatile and do not always reflect long-term trends. But Powell acknowledged Wednesday that policymakers need to focus on both types of inflation in the current environment.
“Core inflation is a good predictor of inflation going forward, core inflation is volatile. So, in normal times, you see through volatile movements in commodities,” he said. “The problem with the current situation is that if you have persistent supply shocks, they can actually start to work at weakening or de-anchoring inflation expectations. The public doesn’t distinguish between core and core inflation in their thinking.”
Markets expect the Fed to raise rates by another half a percentage point in September, according to CME Group’s FedWatch tracker. However, the probability of a big three-quarter-point increase rose to 38% on Friday morning.