Pay growth and prices picked up, keeping the Fed on track for rate increases.

on Jul31
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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.

“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.”

“The president will continue to do everything in his power to tackle inflation and work with Congress to lower prices,” Cecilia Rouse, chair of President Biden’s Council of Economic Advisers, said in a statement after the release.

Gas prices have dropped sharply this month, which should pave the way for slower inflation in July data. But it is not clear how durable those changes will be, and there are plenty of other worrying signs about the inflation outlook.

Prices have been increasing rapidly for more than a year, and central bankers are focused on trying to restrain demand and drive inflation lower before it becomes ingrained. Once consumers and businesses begin to expect and accept ever-higher costs, it may be harder to quash them: Workers could begin to ask for higher wages to cover their higher costs, and companies may begin steadily raising prices to cover their climbing labor bills in an upward spiral.

Most economists think that America is not there yet, but wage growth has picked up — probably to a point that would make it difficult for price increases to moderate back toward the Fed’s 2 percent inflation target. Companies are unlikely to stop raising prices when their labor bills are increasing so much.

That is why Friday’s Employment Cost Index data are problematic for the Fed. The report’s wages and salaries measure rose 5.3 percent from a year earlier before being adjusted for inflation, up notably from 4.7 percent in the previous reading. Private wages and salaries climbed an even more robust 5.7 percent.

And the details of the inflation report made clear that price pressures remained strong. A core inflation measure, which strips out volatile food and fuel prices to get a sense of underlying inflation trends, had been slowing down on a monthly basis. That reversed in June: Prices climbed 0.6 percent from the previous month, the fastest reading in more than a year and up from 0.3 percent in May.

After more than a year of waiting in vain for inflation to peak, economists are looking toward consumer spending for a signal of when, and how much, it might finally moderate.

Analysts have been predicting for months that consumers will eventually find themselves unable to keep up with climbing costs, which will prompt them to slow their spending so much that it weighs on demand and allows supply to catch up.

May’s spending report had suggested that the pullback might be beginning, but buyers staged a comeback in June. Spending overall rose 1.1 percent, slightly faster than the 1 percent monthly increase in consumer prices.

“Airplanes and trains are overbooked, hotels are near capacity, and leisure groups are reporting very strong demand indicating a willingness to spend over the summer,” Greg Daco, chief economist at EY-Parthenon, wrote after the release.

Strong demand for cars, exercise equipment and physical goods has helped push prices up over the past year. Policymakers have been hoping that, as the pandemic eases, consumers will shift back to spending on services, allowing supply chains to catch up and inflation to cool.

And some data points suggest that the economy is already in trouble. The economy sank for the second quarter in a row after inflation is taken into account, data released Thursday showed, which is a common though unofficial definition of a recession.

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