Pay growth and prices picked up, keeping the Fed on track for rate increases. – The New York Times

July 30, 2022 by No Comments

Wages, prices and consumer spending all continued to climb, the latest government data showed Friday — fresh evidence that the economy remains resilient amid fear of a recession, but also that inflation is likely to remain a vexing problem for the Federal Reserve.

Consumer prices climbed 6.8 percent over the year through June, according to the Fed’s preferred inflation gauge, the Personal Consumption Expenditures measure. That was the fastest pace since 1982. Consumer spending rose even faster than prices, though, as Americans shelled out money for cars, vacations and restaurant meals even as higher gas and grocery bills strained household budgets.

Meanwhile, paychecks grew briskly, albeit not enough to keep up with inflation. The Employment Cost Index for the second quarter rose 5.1 percent from a year earlier.

Taken together, the data released Friday indicated that the consumer economy has retained momentum in the face of the highest inflation in decades. That should ease concerns that an economic downturn has already begun but, paradoxically, could also make future economic pain more likely: Strong demand will put continued upward pressure on prices, potentially forcing the Fed to react more aggressively to cool demand and bring inflation under control.

Central bank officials on Wednesday made their second supersize rate increase in a row — three-quarters of a percentage point — as they try to slow down the economy by making money more expensive to borrow. They have signaled that they will closely watch incoming economic readings as they consider whether to make another giant move at their next meeting in September, and a number of economists said Friday’s data were likely to prod the officials toward continued decisive action.

“This is a print that’s going to keep Fed officials up at night,” Omair Sharif, founder of Inflation Insights, wrote in reaction to the fresh wage data. “The monthly inflation and activity data are going to have to cooperate in a very big way for the Fed to step down.”

Jerome H. Powell, the Fed chair, said during his news conference this week that officials could raise interest rates three-quarters of a point again, though he did not commit to such a move. The Fed has nearly two months, and a lot of economic data to parse, between now and its next rate decision.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said in an interview on Friday that raising rates half a point at upcoming meetings “seems reasonable” to him. But he noted that inflation data had been surprising “in a bad way” and said that if core inflation remained high, it could push him to think a three-quarter point move was needed.

“It continues to be concerning,” Mr. Kashkari said of the data released Friday. “I’m waiting for some good news to come: Some surprises that, oh, inflation was lower than we were expecting.”

As rapid price increases challenge the Fed, they are also dogging the White House, which called Friday’s inflation numbers “too high.”

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