Key US inflation gauge hits 6.8% as prices continue to climb

WASHINGTON– An inflation indicator closely watched by the Federal Reserve jumped 6.8% in June from a year ago, the biggest increase in four decades, and does not leave Americans feeling relieved about the surge costs.

Friday’s Commerce Department figures underscored persistent inflation that is eroding Americans’ purchasing power, undermining their confidence in the economy and threatening Democrats in Congress ahead of the midterm elections in november.

Month-over-month, prices rose 1% from May to June, faster than the 0.6% rise from April to May and the biggest such rise since 2005.

The government report also says consumer spending managed to narrowly outpace inflation, rising 0.1% from May to June after adjusting for price changes. Consumer spending weakened in the face of high inflation. But that’s helping fuel inflation itself, with demand still strong for services ranging from plane tickets and hotel rooms to restaurant meals and new and used cars.

Inflation has risen so rapidly that despite the wage increases many workers have received, most consumers are falling behind the pace of cost-of-living spending.

Inflation and high interest rates are also hampering the US economy, which contracted in the April-June quarter for the second straight quarter, heightening fears that a recession is looming. Two quarters of declining growth is an informal rule of thumb for the onset of a recession, although robust hiring suggests the economy still retains pockets of strength and is not yet in recession.

On Wednesday, the Fed raised its benchmark interest rate by three-quarters of a point for the second straight time in its most aggressive campaign in more than three decades to rein in high inflation. Chairman Jerome Powell has signaled that the pace of Fed rate hikes may slow in the coming months.

Still, Powell pointed out that Fed policymakers see fighting inflation as their top priority. He gave no indication that a weakening economy would prompt the Fed to slow or reverse its rate hikes this year or early next year if inflation remained elevated.

By raising borrowing rates, the Fed is making it more expensive to take out a mortgage, car or business loan. The goal is for consumers and businesses to borrow, spend and hire less, thereby cooling the economy and slowing inflation.

During the January-March quarter, consumers increased their spending, even after adjusting for inflation. But that figure was equivalent to a paltry 1% annual gain, down from 1.8% in the January-March period. At the same time, significantly higher mortgage rates have undermined the housing market: sales of existing homes have fallen for five consecutive months, contributing to the contraction of the economy in the April-June quarter.

On Thursday, President Joe Biden dismissed any notion that a recession had started. Biden pointed to still solid job growth, an unemployment rate near a half-century low and a flurry of investment from semiconductor companies as evidence that the economy is still healthy.

Biden also welcomed a deal forged by Senate Democrats on a slimmed-down version of his Build Back Better legislation, which many economists believe could slow inflation over time. The bill would reduce the government’s budget deficit, which dampens inflation by reducing aggregate demand. It would also reduce spending for seniors by allowing Medicare to negotiate the price of certain drugs.

Across the economy, soaring inflation was the consequence of the economy’s rapid rebound from the 2020 pandemic recession. Record borrowing rates and consumer savings accumulated during the pandemic have overwhelmed factories, ports and freight yards. The resulting shortages of goods and labor sent prices soaring. Russia’s war against Ukraine has further accelerated world prices for energy, food, fertilizer and other goods.

The Fed tends to watch Friday’s inflation gauge, called the personal consumption expenditure price index, even more closely than it tracks the government’s better-known consumer price index. Earlier this month, the CPI reported an acceleration in inflation, to 9.1% in June from a year earlier, the highest of its kind 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 medical services covered by insurance or government programs. The CPI only covers personal expenses, which have increased more in recent years. Rents, which are rising at their fastest pace in 35 years, are also less weighted in the PCE than in the CPI.

The PCE price index also seeks to account for changes in the way people buy when inflation jumps. As a result, it can capture, for example, when consumers switch from expensive national brands to less expensive store brands.

ABC News

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