Inflation Hits Fresh Four-Decade High, According to Fed’s Preferred Measure

The so-called core PCE index, which excludes volatile food and energy prices, increased 4.8% in June from a year ago, up from 4.7% in May. On a monthly basis, core prices rose a seasonally adjusted 0.6% in June from a month earlier, a sharp pickup from the 0.3% increase in each of the prior four months.

Energy prices surged 43.5% from a year earlier, while food prices gained 11.2%. Prices for durable goods—big-ticket long-lasting goods like factory equipment, appliances and motor vehicles—decelerated for the fifth straight month, rising 6.1% from a year ago, a signal that supply-chain pressures that have driven inflation over the past year and a half are easing. However, prices for services increased 4.9%, the sharpest gain since 1990.

The Fed is confronting the challenge of tightening monetary policy enough to reduce inflation without also quashing growth, a feat that economists often call a soft landing. Officials agreed on July 27 to lift the benchmark federal-funds rate by 0.75 point, the fourth consecutive rise since March. The move brought the rate to a range between 2.25% and 2.5%. With Wednesday’s action, the Fed has raised rates since March as much as it did between 2015 and 2018.

Fed Chairman

Jerome Powell

gave few specifics about the magnitude of coming rate increases, while also hinting at an eventual slowdown. Fed officials have indicated they want to raise the rate to between 3% and 3.5% by the end of the year.

The central bank is watching for signs that inflation is on a glide path toward its 2% inflation target, measured by the PCE price index. The Labor Department’s measure of consumer prices rose 9.1% in June from a year earlier.

The consumer-price index usually runs somewhat higher than the PCE index due to differences in how they are constructed. For instance, the two measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is broader, including spending on behalf of households—for example, employer-sponsored healthcare plans, Medicare and Medicaid. The PCE price index as a result has a heavier weight for healthcare prices. Meanwhile, housing costs account for a much bigger share of the CPI than the PCE price index.

The Fed has traditionally tended to focus on the PCE price index because it gives a more complete picture of consumer prices, while the public and many investors tend to be more aware of the Labor Department’s CPI figure.

Neither of the two inflation measures offered much evidence of a downshift in inflation. However, signs have emerged this month that price pressures in some key parts of the economy are cooling, suggesting that June’s high inflation readings may be the peak. Gasoline prices, which consumers tend to pay close attention to, have fallen around 15% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 36% since mid-May and corn futures prices are down 21% from mid-June.

Gross domestic product, a broad measure of spending on goods and services across the U.S. economy, declined at an annual rate of 0.9% in the second quarter, adjusted for inflation and seasonality. That came on the heels of a 1.6% rate of contraction in the first quarter. Consumer spending, which accounts for roughly two-thirds of total economic output, picked up at a 1% annual rate in the second quarter, down from 1.8% in the first quarter.

Signs of wobbling growth and the likelihood of more Fed rate increases this year are piquing fears of imminent recession. Mr. Powell said Wednesday that while “it’s necessary to have growth slow down” to rein inflation back to 2%, he didn’t believe the U.S. was in a recession because of the unusually robust labor market. The U.S. economy added 372,000 jobs in June, and the unemployment rate held steady at a low 3.6% for the fourth straight month.

Stiff competition for workers has pushed up wage increases. Wages and salaries for private-sector workers rose 5.7% from a year ago in the second quarter, up from 5% in the previous two quarters. High inflation is swamping that rise, threatening to trigger a consumer pullback as workers lose purchasing power. Accelerating wage gains might also keep inflation from coming down, as workers demand higher wages to keep up with high inflation that they expect down the road.

Fed officials are raising rates aggressively in part because of worries that expectations for future inflation are shifting. Economists believe that such expectations can be self-fulfilling—that if people expect inflation to keep rising, workers will require higher pay and business owners will, in turn, raise the prices they charge.

The University of Michigan consumer-sentiment survey showed that longer-term inflation expectations came in at 2.9% in July, down from June’s 3.1% but slightly above the average rate during the 20 years before the Covid-19 pandemic.

Write to Gwynn Guilford at gwynn.guilford@wsj.com