Inflation Rose in June With C.P.I. Up 5.4 Percent

The Consumer Price Index spiked, climbing 5.4 percent in the year through June as used-car prices picked up rapidly.

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A key measure of inflation spiked in June, climbing at the fastest pace in 13 years as prices for used cars, hotel stays and restaurant meals surged while the economy reopens.

The Consumer Price Index jumped by 5.4 percent in the year through June, the Labor Department said on Tuesday, the largest year-over-year gain since 2008 but one that is expected to fade as the economy moves past a volatile reopening period. The Biden administration quickly pointed out that much of the move was tied to temporary supply issues: Prices for previously owned cars and trucks rocketed higher and accounted for more than a third of the increase.

June had the highest inflation since 2008.

Percent change in Consumer Price Index from a year prior

June 2021

+5.4%

August 2008

+5.4%

+4%

+2

GREAT

RECESSION

PANDEMIC

RECESSION

-2

’10

’12

’14

’16

’18

’20

’08

June 2021: +5.4%

August 2008: +5.4%

+4%

+2

PANDEMIC

RECESSION

GREAT

RECESSION

-2

’08

’10

’12

’14

’16

’18

’20

Note: The current recession’s end date is undetermined.

Source: Bureau of Labor Statistics

By Ella Koeze

Yet the White House and Federal Reserve are fixated on inflation data because it has risen faster than many had expected — and the pop might last longer than they had hoped. The administration maintains that price gains will be temporary. But inside the White House, aides have in recent weeks concluded that strong increases could linger for a year or more, according to two administration officials.

Quick price gains can squeeze consumers if wages fail to keep up. Out-of-control inflation could also prod the Fed to pull back its emergency support for the economy sooner than expected, a development that would crimp the price of stocks, homes and other assets and could slow growth overall.

Policymakers still expect inflation to cool to more normal levels eventually, and markets have actually become more sanguine about the price outlook in recent weeks. Many economists argue that the current increases should level off as car supply picks up, consumer spending returns to more normal patterns, and companies rehire and expand capacity. Even so, June’s big inflation number will ramp up scrutiny of price-related data in the months ahead as policymakers assess whether the economy is at greater risk of overheating.

“We expected a pop in inflation like this,” Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said on Tuesday in an interview on CNBC. “Demand came back faster than supply, and there are these temporary bottlenecks. Right now, it’s really — remain steady in the boat, don’t read too much signal into any month of data.”

Gains should soon moderate for a simple reason: The price index has looked artificially high this year when measured against very weak readings from last year, a data quirk that is beginning to fade. The so-called base effect was at its most extreme in May.

Inflation picked up steam in June.

June 2021: +5.4%

+5%

+4

Percent change in Consumer Price

Index from a year prior

+3

+2

+1

2019

2020

2021

Some of June’s rise can be explained through

what’s known as base effects — prices were low

last spring, so the increase from the year prior is

larger. But base effects are now fading and are

not the full story behind the pickup in inflation.

2021 Consumer

Price Index

270

265

260

2020

255

Jan

April

July

Oct.

June 2021: +5.4%

+5%

+4

Percent change in Consumer Price

Index from a year prior

+3

+2

+1

2019

2020

2021

Some of June’s rise can be explained through what’s known as base effects — prices were low last spring, so the increase from the year prior is larger. But base effects are now fading and are not the full story behind the pickup in inflation.

2021 Consumer Price Index

270

265

260

2020

255

Jan.

April

July

Oct.

Notes: C.P.I. of 100 is equal to prices in 1984.

Sources: Bureau of Labor Statistics

By Ella Koeze

But data issues are not the full story behind the increase. Monthly price gains also jumped in June, picking up 0.9 percent from May for the biggest gain in more than a decade. Prices for dinners out, hotel rooms and washing machines are soaring as consumers spend down savings they accumulated over the course of the pandemic and suppliers struggle to keep pace with such strong demand for goods and services.

Officials at the Fed and White House are hoping — and betting — that production will begin to catch up. Used car prices rose by 10.5 percent in June, and have picked up a striking 45.2 percent over the past year. But economists think those price gains should begin to moderate as overall car production picks up and as car rental companies stop snapping up older vehicles in a bid to bolster their fleets. Some prices that had spiked earlier this year, like that for lumber, are already cooling off.

Yet some bottlenecks and price increases could prove longer lasting. Shipping costs might remain elevated for months. Rents, which make up a big chunk of the overall price index, are rebounding after a pandemic lull. And as diners return to restaurants but companies struggle to hire, employers are lifting wages to attract workers. That seems to be seeping into the cost for a full-service meal, which rose by 0.8 percent in June and is up 4.1 percent over the past year.

Whether higher wages begin to pass into inflation more broadly is critical to the longer-term price outlook. Rising pay and prices can feed on one another in an upward spiral, as workers bargain for higher pay to cover their climbing cost of living, and employers pass higher labor costs along to shoppers.

Image

Gas prices also remain a potent and highly visible symbol of rising prices when many consumers are nervous about inflation.Credit…An Rong Xu for The New York Times

A Biden administration official on Tuesday said the White House did not believe the rapid price gains were the start of a sustained cycle of wage and price increases like the one that plagued the country in the 1970s, emphasizing the many pandemic-affected sectors driving the current increase.

Jerome H. Powell, the Fed chair, has repeatedly said that he and his colleagues think the price gains will slow, though they are watching them closely and would be prepared to act if signs of runaway inflation materialized.

The Fed targets 2 percent annual price gains on average over time, a goal it defines using a different index. Still, the C.P.I. is closely watched because it comes out more rapidly than the Fed’s preferred gauge and it feeds into the favored number, which has also accelerated.

Republicans have pointed to rapid price gains as a sign of the Biden administration’s economic mismanagement, and an argument against the kind of additional spending that President Biden has called for as part of his $4 trillion economic agenda, including investments to fight climate change, bolster education and improve child care.

“Bidenflation is growing faster than paychecks, wiping out workers’ wage gains, and leaving American families behind,” Republicans on the House Ways and Means Committee said in a news release following the data report.

The talking point has proved potent because the recent strength in inflation has outstripped the pickup that many officials had expected. In Mr. Biden’s official budget request, released this spring, officials forecast an inflation rate that stayed near historical averages for 2021 and never rose past 2.3 percent a year over the course of a decade. Administration officials have now begun to acknowledge that higher inflation could stay with the economy for a year or two.

The possibility that inflation will not fade as quickly or as much as expected is becoming a defining economic risk of the era. Signs that strong demand could bolster prices, at least for a time, abound. A New York Fed survey out Monday showed that consumers expect to keep spending robustly in the year ahead.

Some members of the business community see price pressures lasting.

Hugh Johnston, the chief financial officer of PepsiCo, told analysts on Tuesday that the company was anticipating more inflationary pressures via higher costs for raw materials, labor and freight. “Are we going to be pricing to deal with it? We certainly are,” he said.

Jamie Dimon, JPMorgan Chase’s chief executive, told analysts on a conference call on Monday that “it’ll be a little bit worse than the Fed thinks. I don’t think it’s all going to be temporary. But that doesn’t matter if we have very strong growth.”

Price gains are likely to remain rapid on an annual basis into next year, said Omair Sharif, a former strategist at the investment manager Millennium Management.

“I’ll fully admit that this has gone on longer than I would’ve guessed,” Mr. Sharif said, pointing particularly to the bounce in car prices. He added that the long slog back to lower inflation probably won’t change Fed policy, but it could make communicating harder for officials. “‘Transitory’ probably means more like nine to 12 months.”

Some central bankers have become more worried. A “substantial majority” of Fed officials “judged that the risks to their inflation projections were tilted to the upside because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed,” minutes from their June meeting showed.

Image

Used car prices jumped by 10.5 percent in June, and have picked up a striking 45.2 percent over the past year.Credit…An Rong Xu for The New York Times

But investors have marked down their inflation expectations in recent weeks, and markets did not react strongly to Tuesday’s data. That suggests that people who are betting their money in markets do not think that strong price gains will force the Fed to pare back bond-buying or lift interest rates sooner or more aggressively than they had previously expected, denting asset prices.

“We expect the month-to-month core C.P.I. numbers to moderate over the summer, before slowing more sharply in the fall if, as we expect, used car prices drop sharply,” Ian Shepherdson at Pantheon Macroeconomics wrote in a note following the release. “The Covid hit is clear and obvious and we expect Chair Powell and most of the other governors to continue arguing that the surge will prove transient.”

Plus, the continued spread of the coronavirus globally and the growing importance of the very-contagious Delta variant had injected a renewed risk into the economic outlook, influencing market pricing and putting a premium on policy flexibility at the Fed.

“Policy is in a great place right now,” Ms. Daly, the San Francisco Fed president, said on CNBC on Tuesday, adding that she thought the Fed would be in a good place to begin slowing bond purchases later this year or early next.

“It’s ready to respond to whatever the economy brings us,” she said.

Mr. Powell is set to testify before House lawmakers on Wednesday and Senate lawmakers on Thursday, which will give investors and economists a chance to see how he is interpreting the latest data.

Lananh Nguyen contributed reporting.

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