Key inflation indicator hits new 40-year high

• A key gauge of US inflation hits a new 40-year high.
• It is the personal consumption expenditures (PCE) price index.
• This index measures the variation in the costs of goods and services that consumers buy.

An inflation gauge closely watched by the Federal Reserve jumped 6.8% in June from a year earlier. It’s the biggest increase in four decades, leaving Americans without relief from rising costs, The Associated Press reported.

Government figures on Friday underscored the persistence of inflation that is eroding Americans’ purchasing power, weakening their confidence in the economy and threatening Democrats in Congress in the run-up to November’s midterm elections.

Inflation indicator suffers biggest increase in decades

Month-over-month, prices rose 1% from May to June, faster than the 0.6% rise from April to May and the biggest increase since 2005. A separate government report on Friday reinforced the fact that the economy remains trapped by inflationary pressures.

A measure of employee wages excluding government workers rose 1.6% in the April-June quarter, matching a record reached last fall. Higher wages can drive inflation if companies pass on their higher labor costs to their customers, as they usually do.

Consumer spending managed to outpace inflation last month

The Fed closely monitors this report, known as the labor cost index, and takes it into account in its interest rate decisions. The sharp rise in the index last fall contributed to the Fed’s policy shift toward a credit tightening. The government also reported on Friday that consumer spending managed to outpace inflation last month, rising 0.1% from May to June after adjusting for price changes.

Consumer spending, the main engine of the economy, has weakened in the face of high inflation. But for now, it’s still helping to fuel inflation, with demand still strong for services, ranging from airline tickets and hotel rooms to restaurant meals and cars. Filed Under: June US inflation

Could rising inflation lead to a recession?

Inflation has been rising so fast that, despite the pay raises many workers have received, most consumers are falling behind on cost-of-living expenses. High inflation and interest rates are also hampering the US economy, which shrank in the April-June quarter for the second consecutive quarter, intensifying fears that a recession is looming.

Two quarters of declining growth meet a loose rule of thumb for when a recession starts, although strong contracting suggests the economy still has pockets of strength and is not yet in a recession. On Wednesday, the Fed raised its benchmark interest rate by three-quarters of a point for the second straight time in its most aggressive campaign in more than three decades to rein in high inflation. Filed Under: June US inflation

How you can prepare for a US recession

If you think the recession could destabilize your finances, it’s important to know how much you spend each week. Yiming Ma, a professor at Columbia University, recommends sitting down and writing down (or typing) how much you spend each day. This will help you know your income and payments, and you will be able to determine which expenses are unnecessary, according to the AP.

The FDIC’s financial education program Money Smart also recommends this first step. “By understanding how much money you have and how much money you spend, it is possible that you can implement changes that will help you in difficult times,” recommends the government agency. Once you have made a budget, you will be able to identify where you are spending more than necessary. An additional benefit is that you will be able to identify unnecessary expenses and delete them in order to create a savings plan. Filed Under: June US inflation