The flames of inflation fears got a fresh dose of fuel on Tuesday after United States government data showed that consumer prices surged again in June.
Consumer prices spiked 0.9 percent last month after rising 0.6 in May, the US Department of Labor said. That is the sharpest one-month change since June 2008.
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Over the last 12 months, the all items consumer price index rose 5.4 percent in June – the largest annual increase since August 2008. The all items index has been trending up every month since January when the 12 months change was 1.4 percent.
A little bit of inflation is a good thing for an economy because it incentivizes consumers to buy goods and services now, rather than sit on their wallets in expectation of prices dropping. But too much inflation is decidedly bad, especially if it triggers a vicious upward price spiral that prompts monetary policymakers to hike interest rates and potentially derail the nation’s economic recovery from COVID-19.
There are two camps of thought on inflation right now. One holds that price spikes are a temporary consequence of generous government stimulus benefits, and supply bottlenecks for raw materials and labour stemming from businesses gearing up operations as pandemic restrictions are rolled back and consumers unleash pent-up demand.
Federal Reserve Chief Jerome Powell falls in that camp. He and his fellow US monetary policymakers have said they are willing to tolerate inflation running above the Fed’s target rate of 2 percent for some time if that is what it takes to heal the US job market from the ravages of COVID-19.
But other economists and data watchers are worried that inflation may not be all that temporary and that the Fed may act too late to tame it without slamming the brakes on growth.
There is also a fierce debate among economists about the state of the nation’s job market. In June, the nation’s unemployment rate was 5.9 percent – well above its pre-pandemic level of 3.5 percent. And there were 9.5 million unemployed workers last month.
But in May, there were 9.2 million job openings in the US. And in a signal of how confident some Americans feel about their job prospects, some 3.6 million of them quit their jobs in May.
Some blame the $300 a week federal top-up to state unemployment benefits for acting as a disincentive for the jobless to pound the pavement in search of work. Others cite fear of COVID-19, bottlenecks for certain types of labour, and childcare challenges for keeping the unemployed from taking jobs.
To entice job candidates to take open positions, some businesses have been raising wages or offering signing bonuses. Some economists are now concerned that rising wages could trigger a wage-price spiral. But others point out that paycheques for low-income Americans had fallen behind before the pandemic, and they are simply getting a long-overdue raise.
Meanwhile, as inflation rises, it is low-income households that feel the most pain because soaring prices – especially for essential purchases like food and fuel that cannot be put off – eat up a larger share of their income.
Food prices surged 0.8 percent in June after rising 0.4 percent in May. Energy prices rose 1.5 percent last month over May when they were flat.
Strip out food and energy, and so-called “core” consumer price index rose 0.9 percent in June after increasing 0.7 percent in May. Many of the same categories of consumer goods continued to see price rises including used cars and trucks, new vehicles, airline fares and apparel.
“While the upward pressure on prices from goods shortages and reopening should eventually fade, we expect a sustained acceleration in wage growth to ensure that core inflation drops back only gradually over the coming quarters,” said economists at Capital Economics in a note to clients on Tuesday. “From an average of just over 3% this year, we expect core CPI inflation to be 2.8% next year, much higher than Fed officials appear to be anticipating.”