The inflation figure that the Fed is watching closely hits its highest level since January 1982

An inflation gauge the Federal Reserve uses as its primary barometer hit its highest 12-month gain in more than 40 years in June, the Bureau of Economic Analysis reported Friday.

The personal consumption expenditure price index rose 6.8%, the biggest 12-month rise since the 6.9% increase in January 1982. The index rose 1% from to May, matching its largest monthly increase since February 1981.

Excluding food and energy, the so-called core PCE rose 4.8% from a year ago, up a tenth of a percentage point from May, but from the recent high of 5, 3% reached in February. On a monthly basis, the core rose 0.6%, its biggest monthly gain since April 2021.

Both base readings were 0.1 percentage points above Dow Jones estimates.

Fed officials typically focus on underlying inflation, but have also turned their attention recently to the numbers, as food and fuel prices soared in 2022.

The BEA statement also showed that personal consumption expenditure, an indicator of consumer spending, rose 1.1% for the month, above the 0.9% estimate and largely due of soaring prices. Real inflation-adjusted spending rose just 0.1% as consumers barely kept up with inflation. Personal income rose 0.6%, beating the estimate of 0.5%, but inflation-adjusted disposable income fell 0.3%.

Earlier this month, data showed the consumer price index rose 9.1% from a year ago, the biggest gain since November 1981. The Fed prefers the PCE to the CPI as a broader measure of inflationary pressures. The CPI indicates the change in personal expenditure of urban households, while the PCE index measures the change in the prices of goods and services consumed by all households, as well as non-profit institutions serving households.

There was more bad inflation news on Thursday.

The Employment Cost Index, another number Fed policymakers are watching closely, rose 1.3% in the second quarter. This was down slightly from the 1.4% gain in the prior quarter, but was above the 1.1% estimate. Additionally, the 5.1% year-over-year increase marked a record high for a data series dating back to the first quarter of 2002.

“The rest of the economy may be slowing, but wages are picking up,” said Nick Bunker, director of economic research at job placement site Indeed. “Competition for workers remains fierce as employers must continue to raise wages for new hires. These searing wage growth statistics may fade in the near term, but they still have a long way to go.”

The Fed used a recipe for rate hikes and asset cuts to depress prices that hit their highest levels since the Reagan administration and helped cool consumer spending.

Private sector wage gains of 1.6% for the quarter are “seriously disappointing” for the Fed, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The Fed tracks the ECI numbers because they take into account compositional effects, or imbalances between the earnings of the highest and lowest paid workers, as well as other factors.

“Wage gains at this rate are far too high for the Fed, as they would require implausibly rapid productivity growth to be consistent with the medium-term inflation target,” Shepherdson wrote.

Fed officials earlier this week approved a second consecutive 0.75 percentage point increase in the central bank’s benchmark interest rate. Inflation by any measure is well above the Fed’s long-term 2% target, and Chairman Jerome Powell has said the central bank is “strongly committed” to bringing inflation down.

Normally, the Fed focuses on inflation excluding food and energy costs, as they are highly volatile and do not always reflect longer-term trends. But Powell acknowledged on Wednesday that policymakers need to be mindful of both types of inflation in the current environment.

“Underlying inflation is a better predictor of inflation going forward, headline inflation tends to be volatile. So in ordinary times you look through volatile movements in commodities,” a- he declared. “The problem with the current situation is that if you have a prolonged period of supply shocks, these can actually start to undermine or unanchor inflation expectations. The public does not distinguish between inflation core and headline inflation in its reflection.”

Markets expect the Fed to hike rates another half a percentage point in September, according to CME Group’s tracker FedWatch. However, the probability of a larger three-quarter point rise increased Friday morning to 38%.

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