Fast price, wage growth keep Fed on track for rate increase
The price index that the Federal Reserve watches most closely climbed 6.6% in the year through March, the fastest pace of inflation since 1982 and the latest reminder of the painfully rapid price increases plaguing consumers and challenging policymakers.
But much of the gain in the personal consumption expenditures price index, released Friday, was driven by a pop in energy prices that came early in Russia’s invasion of Ukraine along with rising food costs. After stripping out volatile food and fuel prices, the index climbed by a more muted 5.2% in the year through March.
On a monthly basis, that core measure picked up 0.3%, slightly slower than its pace the month before.
That hint of moderation is likely a welcome sign for the Fed but not enough to prevent policymakers from making a large rate increase at their meeting next week — especially at a time when wages are climbing swiftly. Officials spent much of 2021 hoping that pandemic-era cost increases would fade as supply chains returned to normal. Instead, inflation has remained too high for the Fed’s comfort for a year, and it has become broader with time.
Price increases were heavily driven by goods shortages in 2021, but costs are now climbing briskly across a range of services, which could make inflation more persistent. As employers struggle to hire enough workers to meet strong consumer demand, they are paying higher wages. Rising labor expenses could prompt some businesses to charge more, and bigger paychecks help households to continue spending on furniture, restaurant meals, and other goods and services.
A Labor Department release Friday showed that a measure of employment costs picked up 1.4% in the first quarter of 2022, more than expected. Private-sector wages and salaries rose 1.3%, according to the measure, which the Fed tracks closely.
Even rapid pay gains are struggling to keep up with rising prices — compensation, adjusted for inflation, has fallen 3.7% in the past year. But the wage increases, along with rapid job growth and substantial savings stockpiles, have been enough to keep Americans shopping vigorously.
Friday’s consumption report showed that personal spending climbed 1.1% in March before accounting for inflation and 0.2% after adjusting for price increases. Both increases exceeded what economists in a Bloomberg survey had expected.
As data suggest that the economy is running hot, the Fed is trying to slow it down to prevent widespread price pressures from becoming embedded. Policymakers lifted interest rates in March for the first time since 2018, by a quarter of a percentage point, and have set the stage for an even larger increase of half a percentage point at their meeting next week.
Friday’s wage data in particular makes a second big increase in June more likely “at the margin,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote after the release.
Many Fed officials now expect to raise rates back to a neutral setting — a bit above 2% — by the end of the year as they try to slow borrowing, temper demand and allow supply to catch up. The goal is to help cool off inflation so that it does not become locked into consumer and business expectations, which might make it a more permanent feature of the U.S. economy.
While policymakers still hope that price increases will begin fading on their own somewhat, they are no longer banking on it.
“In the case of the United States, we have had an expectation that inflation would peak around this time and then would come down,” Fed Chair Jerome Powell said at an event last week. “These expectations have been disappointed in the past.”
Americans have been feeling the pain of higher prices, even if they are spending through it. A record share of people in a Gallup poll placed inflation as the top U.S. economic problem, survey data released this week showed.
As high prices tank consumer confidence, White House officials have been emphasizing the role that the war is playing in elevating inflation, often blaming President Vladimir Putin of Russia for higher prices.
While Russia’s invasion did push gas prices sharply higher last month, inflation had been high for months before the conflict. Households built up cash buffers in 2020 and 2021, helped in part by government stimulus payments, which helped them to sustain fervid spending on couches, cars and grills even as costs climbed higher. Strong demand for goods collided with overseas factory shutdowns and overburdened transit routes to spur shortages and push prices up.
Demand has remained strong, and supply-chain disruptions have continued into 2022, making the central bank’s task ahead all the more difficult. The Fed has in the past caused recessions while trying to weigh down high inflation. Now, officials are constraining the economy just as the war in Ukraine ramps up uncertainty and threatens to keep prices for gas and other commodities elevated.
“It will be another extremely long and challenging year,” Diane Swonk, chief economist at Grant Thornton, wrote in a research note Friday after inflation and wage releases. “Buckle up.”
The outlook for inflation in the months ahead is wildly uncertain. On one hand, the Fed’s pivot on interest rates has pushed mortgage rates sharply higher, which may start to weigh down the housing market and cool off related types of demand. Already, some companies — such as washing machine-maker Whirlpool — are seeing consumer demand wane compared with last year, although it is elevated relative to its pre-pandemic levels.
But costs for key inputs continue to climb, and that may remain the case amid the war in Ukraine and as China locks down key cities to contain the coronavirus.
At Whirlpool, higher input
prices are prompting the company to charge consumers more.
“Historic levels of inflation, notably in raw materials, energy and logistics, will impact us throughout the year,” James W. Peters, the company’s chief financial officer, said Tuesday during a conference call. “However, our previously announced pricing actions are on track and position us to fully offset cost inflation as we exit the year.”
Many products were already struggling to return to normal inventory levels before Russia invaded Ukraine and roiled commodity markets. Cars and trucks, for instance, remained in short supply thanks to shortages of key parts — most critically semiconductors. Executives at Ford Motor Co. said this week that the company had 53,000 vehicles built but that were awaiting chips to be complete.
“Customers’ demand is extremely strong,” Ford CEO Jim Farley said in a Wednesday earnings call. “However, we are still grappling with persistent supplychain issues that prevent us from posting an even stronger quarter.”