Federal Reserve on track for big interest rate hike
The price index that the Federal Reserve watches most closely climbed 6.6 percent 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 percent in the year through March.
On a monthly basis, that core measure picked up 0.3 percent, 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 percent in the first quarter of 2022, more than expected. Private-sector wages and salaries rose 1.3 percent, 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 percent 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 percent in March before accounting for inflation and 0.2 percent 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 make 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 percent — 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.”