Two closely watched inflation reports showed little relief from record price pressures in the United States, underscoring the urgency of the Federal Reserve’s historically swift campaign to cool the economy.
The latest Employment Cost Index (ECI) report, which tracks wages and benefits paid by U.S. employers, showed total compensation for civilian workers in the second quarter increased by 1. 3%. That roughly matched the 1.4% jump in the first three months of 2022, which was the largest quarterly increase recorded in data dating back to 2004.
For the 12 months to June, compensation spending rose 5.1%, well above the 4.5% annual pace recorded last quarter. Wages rose 5.3% compared to the same period last year, after posting a quarterly increase of 1.4%.
“It’s an impression that will keep Fed officials awake at night and will probably [a 0.75 percentage point rate rise] as the baseline scenario for September,” said Omair Sharif, Founder and Chairman of Inflation Insights. “Monthly inflation and activity data are going to have to cooperate in a very big way to get the Fed out of this. [pace].”
The data, released by the Bureau of Labor Statistics, was released Friday alongside the Fed’s favorite inflation indicator, the personal consumption expenditure (PCE) price index. According to the Commerce Department, the overall index rose 1% in June, after rising 0.6% in May. That brought the annual rate to 6.8%, above the 6.3% increase in the previous period.
After volatile elements such as food and energy are removed, “core” PCE rose another 0.6% in June, surpassing the previous monthly increase of 0.3%. On an annual basis, it is up 4.8%.
The Fed’s target for the core PCE is 2%, which means the central bank has a lot more progress to make towards its targets. Thus, interest rate hikes are expected well into the second half of 2022, extending what has become the fastest tightening cycle since 1981.
According to data released by the University of Michigan on Friday, consumer confidence remains near record lows and expectations for future inflation five years out came in at 2.9%.
Economists are divided on how the Fed will calibrate the pace of its interest rate adjustments in the coming months, after implementing a second-week 0.75 percentage point hike to bring federal funds to a new target of 2.25% to 2.50% cent. This aligns the benchmark policy rate with what is generally considered to be “long-term neutral” and does not accelerate or slow economic growth when inflation is 2%.
Fed Chairman Jay Powell said the central bank would move to a “meeting-by-meeting” approach to deciding the pace of rate hikes going forward, forgoing the previous tactic of providing specific guidance well-informed. ‘advance. Still, Powell sent signals about what’s potentially in store for the next policy meeting in September, noting that “another unusually large rate hike” is possible if the data warrants it.
Nancy Vanden Houten, chief US economist at Oxford Economics, said that based on the most recent figures, there is “no evidence that wage growth is slowing”. It also expects another rate hike of 0.75 percentage points in September.
Officials have previously indicated they want to see several months of inflation easing before changing course. As of last month, most rates are expected to rise closer to 3.5% by the end of the year, with further increases to come in 2023.
Friday’s inflation reports come just a day after new data showed the U.S. economy contracted for a second consecutive quarter, a common criterion for a technical recession. However, given the continued strength of the labor market, which is still registering healthy monthly job growth, most policymakers and economists say the conditions for a recession are not yet in place.
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