US price and wage increases slow further in the latest signs of cooling inflation
By Christopher Rugaber, The Associated Press on July 28, 2023.
WASHINGTON (AP) – Signs that inflation pressures in the United States are steadily easing emerged Friday in reports that consumer prices rose in June at their slowest pace in more than two years and that wage growth cooled last quarter. Together, the figures provided the latest signs that the Federal Reserve’s drive to tame inflation may succeed without triggering a recession. A price gauge closely monitored by the Fed rose just 3% in June from a year earlier. That was down from a 3.8% annual increase in May, though still above the Fed’s 2% inflation target. On a monthly basis, prices rose 0.2% from May to June, up slightly from 0.1% the previous month. Last month’s sharp slowdown in year-over-year inflation largely reflected falling gas prices, as well as milder increases in grocery costs. With supply chains having largely healed from post-pandemic disruptions, the costs of new and used cars, furniture and appliances also fell in June. A measure of “core” prices, which excludes volatile food and energy costs, did remain elevated even though it also eased last month. Those still-high underlying inflation pressures are a key reason why the Fed raised its short-term interest rate Wednesday to a 22-year high. Core prices were still 4.1% higher than they were a year ago, well above the Fed’s target, though down from 4.6% in May. From May to June, core inflation was just 0.2%, down from 0.3% the previous month, an encouraging sign. An encouraging report Friday from the Labor Department showed that a gauge of wages and salaries grew more slowly in the April-June quarter, suggesting that employers were feeling less pressure to boost pay as the job market cools. Those figures helped lend support to the hope that the Fed can achieve a “soft landing” – conquering high inflation while still keeping the economy growing. Employee pay, excluding government workers, rose 1%, down from 1.2% in the first three months of 2023. Compared with a year earlier, wages and salaries grew 4.6%, down from 5.1% in the first quarter. The Fed is closely watching the pay gauge, known as the employment cost index. Smaller wage increases should slow inflation over time, because companies are less likely to need to raise prices to cover their higher labor costs. Taken together, Friday’s data “will provide further support to the view that the economy is in the midst of a soft landing,” said Kathy Bostjancic, chief economist at Nationwide. The softer wage data, she suggested, “will be welcomed by Fed officials.” The inflation report that the Commerce Department issued Friday also showed that Americans’ willingness to keep spending, despite two years of high inflation and 11 Fed rate hikes over 17 months, remains a powerful driver of the economy. Consumer spending rose 0.5% from May to June, up from 0.2% the previous month. The U.S. economy is in a hopeful but precarious place: A solid job market is bolstering hiring, lifting wages and keeping unemployment near a half-century low. Yet inflation is weakening rather than rising, as it typically does when unemployment is low. That suggests that the Fed may be able to achieve a difficult “soft landing” for the economy, in which inflation falls toward the Fed’s 2% target without triggering a deep recession. The Fed’s policymakers, though, are concerned that the steadily growing economy could help perpetuate inflation. This can occur as persistent consumer demand enables more companies to raise prices, thereby keeping inflation above the Fed’s target and potentially causing the central bank to raise rates even higher. The latest evidence of the economy’s resilience came Thursday, when the government reported that it grew at a 2.4% annual rate in the April-June quarter – faster than analysts had forecast and an acceleration from a 2% growth rate in the first three months of the year. At a news conference Wednesday, Chair Jerome Powell suggested that the Fed’s benchmark short-term rate, now at about 5.3%, was high enough to restrain the overall economy and likely tame inflation over time. But Powell added that the Fed would need to see more evidence that inflation has been sustainably subdued before it would consider ending its rate hikes. Powell declined to offer any signal of the central bank’s likely next moves. In June, Fed officials had forecast two more rate hikes this year, including Wednesday’s. “I would say it is certainly possible that we would raise (rates) again at the September meeting, if the data warranted,” Powell said Wednesday, “and I would also say it’s possible that we would choose to hold steady at that meeting.” 18-17
