Higher living costs outrunning pay hikes

By U.S. EconomyFOXBusiness

Fed Chair Jerome Powell: It’s important that inflation doesn’t fall below 2 percent

Federal Reserve Chairman Jerome Powell discusses how the economy impacts the natural rate of unemployment and why it’s important that inflation doesn’t fall below 2 percent.

Consumer prices rose at their highest annual rate since 2012 in June, according to the latest CPI data, putting the rise in the costs of goods on a steeper trajectory than wage growth.

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If this trend of consumers’ expenses rising faster than wages continues, this will leave Americans with less money in their pockets, which could be a negative for the economy.

Fortunately, so far, the Trump tax cuts have somewhat cushioned the blow.

This could potentially shrink Americans’ spending ability and with consumer spending an important part of the economy.

The increase in the cost of living rose to a 12-month pace of 2.9% from 2.8% in May. A year ago the annual rate was much lower, at just 1.6%.

The Labor Department’s June jobs report showed that the 12-month wage growth was 2.7%. Trump tax cuts have partially made up for this difference, putting adjusted hourly pay flat over the past 12 months.

When asked about inflation outpacing wage increases, Mike Loewengart, vice president of investment strategy at E*Trade told FOX Business that, “It's not ideal and something we should all be watching as it can threaten growth. That said, inflation has been muted for so long that we shouldn't all be running for the doors quite yet.”

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Higher inflation could push the Federal Reserve to become more aggressive with its rate hikes, but economists have cautioned that a too-aggressive central bank could derail the economy. Right now the Fed expects inflation will soon level off, but if it doesn’t, it may be forced to act.

“Moderate inflation is what we expected, and moderate inflation growth is what we got. While higher inflation doesn’t pose much of a threat now, it’s certainly on the Fed’s radar, especially if wages can’t keep up with rising costs,” Loewengart said in an emailed statement.

The latest consumer price data showed that Americans are paying more for food, cars, rents and medical care. Prices were lower for energy, airline fares and clothing.