Fed’s inflation gauge jumped in June as gas prices soared

Gasoline prices above five-dollars a gallon are posted at a gas station in downtown Los Angeles on Friday, March 16, 2012. (AP Photo/Damian Dovarganes)

A June surge in gasoline prices fueled much higher inflation and a dip in household spending power, according to data released Friday by the Bureau of Economic Analysis (BEA).

The personal consumption expenditures (PCE) price index, a key gauge of inflation, rose 1 percent in June and 6.8 percent annually last month, according to the BEA. The monthly inflation rate rose from 0.6 percent in May and the annual inflation rate rose from 6.3 percent that month.

The PCE price index is the Federal Reserve’s preferred gauge of inflation and heavily influences the central bank’s plans to hike interest rates. The Fed aims for annual inflation of 2 percent each year and is raising interest rates rapidly to bring price growth back down to that level.

Economists expected the PCE price index to show another big jump in inflation in June, a month when the average cost of a gallon of gas in the U.S. rose above $5. The war in Ukraine and the resultant sanctions imposed on Russia have limited the global supply of oil and natural gas — along with food and other commodities — making prices higher and more volatile.

Energy prices rose 7.5 percent and food prices rose 1 percent in June. High energy and food prices also can boost inflation throughout the economy as companies try to cover higher transportation, manufacturing and ingredient costs. 

Energy prices were up 43.5 percent and food prices were up 11.2 percent annually in June, according to the PCE price index.

Without food and energy prices, the PCE price index rose 0.6 percent on the month and 4.8 percent on the year in June, both up higher than their May levels of 0.3 percent and 4.7 percent respectively.

A recent decline in oil prices will likely push inflation down in July. But the June data also showed inflation picking up in areas beyond those directly affected by the war in Ukraine.

The monthly increase in the PCE price index without food and energy held at 0.3 percent in each month between February and May, but doubled to a 0.6 percent increase in June. Yearly PCE inflation without food or energy also rose for the first time since February.

The Fed and economists have paid closer attention to inflation without food and energy prices, also known as “core” inflation, since food and energy markets are more volatile and usually don’t reflect the broader forces pushing prices higher. Higher core inflation may be a sign that Fed rate hikes have not yet slowed the economy enough to make a dent in price growth.

Higher inflation also took a chunk out of household budgets in June. Disposable income rose 0.7 percent in June but fell 0.3 percent after adjusting for inflation. Consumer spending rose 1.1 percent, but just 0.1 percent after adjusting for inflation.

Rising inflation is one of the biggest challenges facing the U.S. economy, which has remained resilient and added 2.7 million jobs this year even as economists see the country edging closer to recession. U.S. gross domestic product dropped for two consecutive quarters, long the rule-of-thumb guide for being in a recession, though economists believe the labor market remains too strong for the U.S. to be in one quite yet.

Even so, consumer confidence in the economy has fallen steadily over the course of the year and poses a massive threat to the Democratic Party’s efforts to retain majorities in the House and Senate in the November midterm elections.

President Biden and Democratic lawmakers have cited the strength of the job market and steadiness of consumer spending to reassure Americans the U.S. is not in a recession. Biden and Democrats are also rallying behind the Inflation Reduction Act, a bill meant to reduce prescription drug costs and speed up energy production while also raising taxes on corporations.

Republican lawmakers have argued the bill would only push the U.S. into higher inflation and have already declared the economy to be in recession, even if most economists have not said the same.


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