Two closely watched inflation reports showed little relief from record-setting price pressures in the US, underscoring the urgency of the Federal Reserve’s historically-fast campaign to cool down the economy.
The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the second quarter increased 1.3 per cent. That was roughly in line with the 1.4 per cent jump during the first three months of 2022, which was the biggest quarterly increase recorded in data stretching back to 2004.
For the 12-month period that ended in June, pay-related expenses were up 5.1 per cent, well above the 4.5 per cent annual pace recorded last quarter. Wages were up 5.3 per cent compared with the same time last year, after registering a 1.4 per cent quarterly rise.
“This is a print that’s going to keep Fed officials up at night and likely sets [a 0.75 percentage point rate rise] as the base case for September,” said Omair Sharif, founder and president of Inflation Insights. “The monthly inflation and activity data are going to have to co-operate in a very big way for the Fed to step down from that [pace].”
The data, published by the Bureau of Labor Statistics, were released on Friday alongside the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index. According to the commerce department, the headline index rose 1 per cent in June, after rising 0.6 per cent in May. That lifted the annual rate to 6.8 per cent, above the 6.3 per cent increase during the previous period.
Once volatile items such as food and energy were stripped out, “core” PCE still rose 0.6 per cent in June, outpacing the previous 0.3 per cent monthly increase. On a year-over-year basis, it is up 4.8 per cent.
The Fed’s target for core PCE is 2 per cent, meaning the US central bank has significantly more progress to make to achieve its goals. As such, interest rate increases are expected well into the second half of 2022, extending what has become the fastest tightening cycle since 1981.
Consumer sentiment remains near record lows, according to data released on Friday by the University of Michigan and expectations of future inflation five years from now came in at 2.9 per cent.
Economists are split as to how the Fed will calibrate the pace of its interest rate adjustments in the months ahead, having implemented a second consecutive 0.75 percentage point rate rise this week to bring the federal funds rate to a new target range of 2.25 per cent to 2.50 per cent. That brings the benchmark policy rate in line with what is broadly considered “long-run neutral” and does not speed up or slow down economic growth when inflation is at 2 per cent.
Fed chair Jay Powell said the central bank would shift to a “meeting-by-meeting” approach in terms of deciding on the cadence of forthcoming rate increases, backing away from the previous tactic of providing specific guidance well in advance. Still, Powell sent signals about what is potentially in store for the next policy meeting in September, noting that “another unusually large rate rise” is possible if warranted by the data.
Nancy Vanden Houten, lead US economist at Oxford Economics, said that based on the most recent figures, there isn’t “any evidence that wage growth is slowing”. She also expects another 0.75 percentage point rate rise in September.
Officials have previously indicated that they want to see several months of decelerating inflation readings before changing course. As of last month, most expected rates to rise closer to 3.5 per cent by the end of the year, with further increases to come in 2023.
Friday’s inflation reports come just one day after new data showed the US economy shrank for a second consecutive quarter, a common criteria for a technical recession. However, given the sustained strength of the labour market, which is still registering healthy monthly jobs growth, most policymakers and economists argue that the conditions for a recession have yet to be met.