Inflation and consumer spending each rose slightly in July as the recovery from the coronavirus recession faced headwinds from surging COVID-19 cases, according to data released Friday by the Commerce Department.
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, rose 0.3 percent in July after climbing 0.5 percent in June and is up 4.2 percent over the past 12 months. The PCE price index minus food and energy prices, which are more volatile, rose 0.3 percent in July and stayed even with June’s annual increase of 3.6 percent.
Personal consumption, a measure of consumer spending, rose just 0.3 percent in July, slowing from a gain of 1.1 percent in June, and fell 0.1 percent on the month when adjusting for inflation. Personal incomes rose 1.1 percent in July, up sharply from a 0.2 percent increase in June, as the IRS began sending out monthly child tax credit payments to millions of U.S. families.
The small rise in consumer spending and prices comes at a crossroads for the U.S. economy as it faces challenges from a new stage of the pandemic.
Inflation has reached its highest level in more than a decade as a broad range of businesses and industries hindered by the pandemic have struggled to meet a rush of demand. Ongoing supply chain disruptions and shortages of crucial parts driven both by the recovery and a new surge of COVID-19 cases have kept upward pressure on prices.
While many economists are confident inflation will cool off as supply chains normalize, the persistence of higher-than-expected price increases and uncertainty over when they will end has boosted pressure on the Federal Reserve to pare back its stimulus for the economy.
In a highly anticipated Friday speech, Fed Chairman Jerome Powell is expected to say the economy is on track to warrant a reduction in the bank’s monthly bond purchases in the future.
But several members of the Federal Open Market Committee (FOMC), the Fed’s monetary policy arm, along with a group of centrist and conservative lawmakers, are pushing the bank to start tapering sooner.
High inflation, even if temporary, also poses political dangers for President Biden and Democrats as they attempt to defend their House and Senate majorities in the 2022 midterm elections. Republican lawmakers have sought to pin the price increases on Biden’s economic policies, though economists attribute most of the recent inflation to short-term pandemic-related factors.
“The key going forward is whether the supply disruptions continue to outpace those to demand. If they do, the [Fed] will be forced to chase inflation at a slower pace of growth than many hoped,” wrote Diane Swonk, chief economist at Grant Thornton, on Twitter. She added that the full impact of the delta variant on consumer demand won’t be apparent until after September.