Core Inflation Stands at 29-Year High, Rises Faster Than Wages

People walk past an Apple retail store in New York on July 13, 2021. Angela Weiss/AFP via Getty Images

WASHINGTON—Consumer prices continue to rise at the fastest pace in decades, prompting critics to argue that the Biden administration’s policies are “overheating” the economy. Inflation also is wiping out gains for workers as consumer prices are rising faster than wages, according to President Barack Obama’s top economists.

The consumer price index (CPI) rose by 0.9 percent last month, the largest gain since June 2008. In the 12 months through June, inflation was up by 5.4 percent.

Core inflation, which excludes the volatile food and energy components, was also up by 4.5 percent over the past year, standing at a 29-year high. Core CPI in June rose by 0.88 percent, more than double the consensus estimate of 0.4 percent.

Many prominent economists, including Larry Summers, have strongly criticized excessive stimulus packages, raising concerns about the risks of overheating the economy and creating harmful inflation.

Summers, who served as Treasury secretary under President Bill Clinton and as director of the National Economic Council under Obama, is growing more concerned after the June inflation reading.

“These figures and labor market tightness and the behavior of housing markets and asset prices are all rising in a more concerning way than I worried about a few months ago,” he told Politico on July 13.

“This raises my degree of concern about an economic overheating scenario. There are huge uncertainties in the outlook, but I do believe the focus of concern right now should be on overheating.”

In a recent op-ed in the Financial Times, Mohamed El-Erian, who is one of the most widely followed economists, echoed similar concerns, saying that there’s too much “on-the-ground evidence” that inflation will stay high.

Both economists believe that the U.S. central bank may be acting too complacently about its ability to contain inflation risk and may end up waiting too long before hitting the brakes.

However, the June inflation report is “unlikely to sway Fed officials in their thinking on inflation,” according to Sarah House, senior economist at Wells Fargo.

“Given the uniqueness of the current period, the dust is far from settled, and most officials seem content to wait for more information on inflation (and the labor market) before feeling ready to taper asset purchases,” she stated in a report.

Federal Reserve Chair Jerome Powell has repeatedly said that the recent rise in inflation will prove “transitory.”

According to Fed officials, the economy still has to make “substantial further progress” toward the central bank’s employment and inflation goals, before it will reduce its asset purchase program and raise interest rates.

Prices Surge Higher Than Wages

The June inflation report showed that supply bottlenecks and ongoing recovery in sectors hit hardest by the pandemic continued to lift consumer prices, according to Wall Street analysts.

Used car prices rose by more than 10 percent in June (45 percent on an annual basis), accounting for nearly half of the increase in core inflation. The global semiconductor shortage continues to undercut car manufacturing, pushing up prices of used cars and trucks. While chipmakers have ramped up production to meet the demand, the new capacity won’t come online until 2022, according to chip industry experts.

Semiconductor supply chain issues have also affected new vehicle prices, which were up by 2 percent in June.

“On top of supply problems, there were further signs of inflation broadening out in June,” House wrote.

The reopening of the economy, summer holidays, and higher gas prices have boosted the cost of travel and tourism, which contributed to more than 20 percent of the rise in core inflation reading. Airfares were up by 2.7 percent and hotels rose by 7 percent last month.

The price index for hotels returned close to pre-pandemic levels, while airfares still have some room for growth, according to economists.

Food prices rose by 0.8 percent in June, as restaurant owners and grocery stores are increasingly passing costs onto consumers.

Agriculture commodity prices are near a decade high, and food could be “a major driver of inflation over the next few months,” according to House.

The wage increases in hospitality are also being passed on to restaurant prices, which were up by 0.7 percent in June, “the biggest monthly gain since 1981,” a JPMorgan report reads.

And gasoline prices were up by 2.5 percent, 45 percent year-over-year.

While transitory factors continue to push prices higher, persistent components of inflation are also showing strength, the analysts said.

Owners’ equivalent rents, which are used to estimate shelter cost—a monthly rent that would be equivalent to the monthly expenses of owning a house—rose by 0.32 percent in June and rents increased by 0.23 percent.

These increases are notable, according to Ellen Zentner, chief U.S. economist at Morgan Stanley.

“Both of these components make up part of the more persistent inflationary pressure we have been expecting to form over the course of this year and into next year,” Zentner wrote in a report.

Widespread labor shortages have led companies to boost wages, but consumer prices are rising much faster than those wages, according to the top economists of the Obama administration.

“Inflation-adjusted real wages are falling,” Jason Furman, chair of the Council of Economic Advisers under Obama, wrote on Twitter on July 13.

“Nominal wage growth has grown 3.6% [annual rate] since December 2019, that is 0.9 pp [percentage point] faster than it was running pre-pandemic. BUT inflation has picked up even more so real wages are 1.3% below trend.”

Steven Rattner, former head of the Auto Industry Task Force under Obama, also reacted to inflation numbers on Twitter.

“Recent wage increases will mean nothing for workers if inflation escalates,” he wrote.