The Federal Reserve’s preferred measure of inflation rose 4 percent year over year in June as a recovering economy and strong demand for goods and services drove prices higher.
The increases in the consumer spending inflation index were the fastest since 2008, but they were in line with economists’ expectations. This rapid pace is unlikely to last – and how much and how quickly it slackens is the economic question of the moment.
Inflation has been surprisingly rapid this year. Economists knew prices would rise sharply as measured against weak numbers from 2020 when the cost of many popular purchases plummeted. But the jump in the past few months has been more intense than most expected.
This is in part because America’s reopening economy has been experiencing supply bottlenecks. The scarcity of computer ships drove up electronics prices and delayed automobile production, causing used car prices to skyrocket as people struggled to find vehicles. Employers are struggling to hire workers fast enough to meet recurring demand, and wages and prices in restaurants and some other service providers are rising.
Spending remains strong, as Friday’s release showed, up 1 percent in June versus May. That was more than the 0.7 percent pop economists expected in a Bloomberg poll, and adjusted for inflation, it was still a 0.5 percent increase.
Even if consumer demand persists, June inflation data could be a high point in the price pressures saga. The low numbers of last year are becoming less important and many economists assume that the rapid price gains will weaken in the coming months. A breakneck spike in used car prices big enough to drive up headline prices showed signs of slowing in July.
But how quickly inflation will fall back to the Fed’s 2 percent target that it is trying to achieve on average over time is becoming increasingly uncertain. It’s hard to say how quickly the supply chain knuckles that have complicated the pricing picture so far this year will clear up, or if new ones will emerge. Rising coronavirus cases around the world and the emergence of new variants like Delta could result in persistent disruptions in global production and shipping routes that will hit on time for back to school and Christmas shopping hours.
“The problem with the Delta variant is that the factors that reduce the supply of goods and labor are extended and persist,” said Constance L. Hunter, chief economist at the accounting firm KPMG. “This prolongs many of the components of the pandemic that caused inflation.”
Michael Patrick, a cook and restaurateur in Memphis, had to raise chef and dishwasher salaries to get them to return to his upscale Southern restaurant, Rizzo’s by Michael Patrick. Its food costs have also increased because supply chain problems have made it difficult to get chicken and other essential ingredients. That is why he has raised the menu prices twice in the last few months. So far, his customers have not complained.
“People don’t even blink,” he said. “No one said to me, ‘I can’t believe you raised your meatloaf by two dollars.'”
But Mr. Patrick is concerned about the effects of the Delta variant. Both he and his customers have learned to navigate the pandemic life, he said, so he is confident that he will be able to maintain sales. However, if the resurgence of the virus results in further shutdowns in meat processing plants and other food manufacturers, it could be more of a challenge.
“Rapeseed oil, beef, chicken – everything is increasing because the supplies just weren’t there,” he said. “Hopefully these variants will not ultimately lead to many of these companies closing their doors again.”
Daily business briefing
July 30, 2021, 3:04 p.m. ET
It will matter to workers how quickly today’s robust price increases wear off. Higher prices weigh on workers’ paychecks. Income after tax fell 0.5 percent in June due to the impact of inflation. Last year, inflation more than offset a slight increase in after-tax income.
Data released on Friday showed that core inflation, which masks volatile food and fuel prices and can provide a clearer view of price developments, rose 3.5 percent in June year-over-year, its highest annual value in 30 years.
The headline index climbed 0.5 percent from May to June, slightly less than the 0.6 percent that economists had expected in a Bloomberg poll.
The new inflation data released by the Department of Commerce came later as a separate Department of Labor inflation report. But they are being watched closely because the Fed uses the Personal Consumption Spending Index, which tracks the things people consume but don’t pay for directly, such as medical care, to gauge progress toward their inflation target.
“The US economy surprised us all,” said James Bullard, president of the Federal Reserve Bank of St. Louis, during a speech on Friday. “A lot of inflation, a lot more than we’ve seen in the past. Of course we expect it to be moderated, but I don’t think it will be fully moderated in 2022. “
The Fed is ready to factor in inflation, which it expects to be temporary, but it would be concerned if rapid gains turned into a more difficult situation. In particular, officials watch trends such as rising wages to get a feel for whether the price gains are lasting.
Wages and salaries rose 0.9 percent in the second quarter, slightly more slowly than in the first three months of the year, according to separate data released by the Labor Department on Friday. But wages are rising rapidly in some industries that will reopen in the wake of the pandemic: wages in the leisure and hospitality industry rose 2.8 percent in the second quarter and 6.1 percent last year.
Should wage increases become a cycle – in which workers regularly ask for more money to cover rising costs and employers raise wages but pass the costs on – it could lead to sustained inflation. Fed officials generally don’t believe this is happening right now.
“There is some form of wage inflation that can lead to price inflation, and we are not seeing that right now,” said Jerome H. Powell, chairman of the central bank, at a news conference on Wednesday.
Mr Powell and many of his colleagues have argued that when the economy returns to normal, price pressures should ease – Mr Bullard is one of the more worried Fed officials when it comes to inflation. Many central bankers point out that, although inflation has risen sharply in recent months, consumer expectations for future inflation remain at historically normal levels.
White House economic officials have made similar points, arguing that high inflation is not a reason to turn back political ambitions, which they believe would not add to price pressures. The Biden administration is trying to get a bipartisan $ 1 trillion infrastructure bill through Congress that includes $ 550 billion in new spending to attract widespread investments in the country’s public transportation and works make.
But Republicans have seen rising inflation as a poignant way to criticize the Biden administration, which they believe is mishandling the economic reopening and causing prices to run out of control.
“There’s no question we have serious inflation right now,” said Senator Patrick J. Toomey, a Republican from Pennsylvania, in a CNN interview last week. “The question arises, how long will it take. And I’m just worried that the risk is high that this will stay with us for a while. “
Even some central bankers become cautious when inflation rises.
“The risk of inflation is that it won’t fall back as quickly as we hoped, or that we might get another shock that will push inflation even higher in 2022,” Bullard said on Friday. He argued that the central bank should start slowing its large bond buying campaign so that it should end this “rejuvenation” early next year and be ready to hike rates if necessary.
“It’s not that we have to take off earlier,” he said. “But we want the option.”