In June, the Consumer Price Index rose by 0.1%, lifting the rate for the past year to 2.9% - a meaningful increase from the 1.6% rate just a year prior. At 2.9%, the headline rate was the highest since February 2012.
Core inflation also continues to rise, up 0.2% in June. The year-over-year core rate of 2.3% is the highest since January 2017.
Energy costs eased fractionally in June, but – having risen by 12% over the past year – rising energy prices have still been a meaningful catalyst for the broader increase in prices.
Still, the current reflationary story isn’t just about energy costs. Service costs have been rising at a solid clip for some time, and that shows little sign of abating. Excluding energy related services, prices in the sector have risen by 3.1% in the past year.
Other factors appear poised to potentially contribute to further inflationary pressures. Wage growth, which had been stagnant for several years, is showing signs of accelerating. While not as apparent in average hourly earnings, total compensation costs (including benefits) have been rising at a stronger clip. It’s highly likely that at least a portion of those rising costs will filter through to the prices consumers will be paying for goods and services.
It’s possible that there is a hidden reservoir of potential workers that are outside the labor force, but could return. Evidence of that was clear last month as an estimated 600,000 new workers entered (or re-entered) the labor force. The abundance of job openings nationally should entice others to exit the sidelines and look for a job. That would certainly help ease pressure on wages to some degree, but the potential mismatch between the skill set needed to fill a job and the skills demonstrated by applicants could weigh on productivity and still contribute to inflation.
The bottom line is that labor market conditions remain tight, as demonstrated again by weekly jobless claims for the week ended July 7. Claims remain near half-century lows. Employers aren’t laying off in mass numbers, and as it becomes harder to find workers, the value of current employees increases.
One other cautionary note lies in the increased trade tensions and tariffs that have been imposed. These developments will also contribute to rising inflation, although it’s impossible to estimate reliably the degree to which that will be the case. How long could the already announced tariffs be in place? What more could be on the table? Where – and when – does the escalation end? There’s no way to say, but while there are many questions about the end game and ultimate impact, we should expect some degree of additional inflationary pressures to be one result.
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