U.S. Consumer Price Increases Are Eating Away Worker Wage Gains

WASHINGTON—U.S. consumer prices rose for a third straight month in June, eating away at modest wage gains and sending inflation to its highest rate in more than six years.

The consumer-price index, which gauges what Americans pay for everything from veterinarian services to baby clothes, rose a seasonally adjusted 0.1% in June from the prior month, the Labor Department said Thursday. Excluding volatile food and energy components, prices increased 0.2%. Economists surveyed by The Wall Street Journal had expected a 0.2% uptick from May for both the overall index and so-called core inflation.

Last month’s price increases brought the CPI’s cumulative growth in June from a year earlier to 2.9%, the highest level since February 2012. Core inflation ticked up to 2.3% in June from a year earlier, the highest rate since January 2017.

For a second month in a row, annual inflation fully offset average hourly wage growth in June, leaving workers’ real hourly earnings flat from a year earlier despite falling unemployment and a generally strong economy. Production and nonsupervisory employees, a category which includes blue-collar workers, saw their real average hourly wages fall 0.2% in June from a year earlier after a similar slip in May.

“It’s the boiling-frog metaphor,” said Marc Hall, a 58-year-old communications specialist in Rockville, Md. “You notice it a little at a time, here and there, and then at the end of the year, you say, ‘Yeah, things went up a lot, didn’t they?’”

Mr. Hall said that while he received a 2% pay raise in the past year, he senses that his earnings haven’t kept up with the cost of living, adding, “It’s a net loss.”

While workers made up for higher prices by working slightly more hours per week, the stagnation of Americans’ purchasing power underscores questions about the extent to which workers are benefiting from an economy that by many other measures is booming.

Economists estimate gross domestic product grew in the second quarter at one of the fastest clips measured since the recession, while corporate tax cuts enacted at the end of 2017 likely fueled record earnings by publicly traded U.S. companies, analysts say.

“Wage growth remains surprisingly weak,” said David Kelly, chief global strategist at J.P. Morgan Asset Management, in a note to clients earlier this week. “The remarkable ability of firms to lure more workers back into the labor force and get stronger productivity gains from them without raising wages is a clear positive for profits.”

The year-over-year rise in prices was led by energy commodities, following a sharp rise in oil prices earlier this spring. The CPI report showed gasoline prices rising a seasonally adjusted 0.5% in June from May and 24% from a year earlier. Separate data from the U.S. Energy Information Administration showed the average price for a gallon of regular gasoline rose to $2.89 last month, the highest price for June since 2014.

Prices for other goods and services also increased.

Shelter and rent costs, which account for about a third of overall consumer spending, rose 0.1% in June from May and were up 3.4% from a year earlier. Medical-care services rose 0.5% from May and 2.5% from June 2017. And food prices rose 0.2% last month from May, though the annual increase in this category was more muted at 1.4%.

For many economists, accelerating inflation suggests the economy is behaving more or less as it should after years of fitful expansion that has brought the jobless rate near its lowest levels since the 1960s. A separate inflation measure favored by the Federal Reserve, the personal-consumption expenditures price index, rose in May to 2.3% from a year earlier, the highest annual rate in six years and 0.3 percentage point above the central bank’s target.

This has bolstered Fed officials’ case for gradually raising short-term interest rates to keep the economy from overheating. They have lifted rates twice this year and penciled in two more increases by year’s end.

At their most recent rate-setting meeting, in June, Fed “participants generally agreed that the economic expansion was progressing roughly as anticipated, with real economic activity expanding at a solid rate, labor market conditions continuing to strengthen, and inflation near the Committee’s objective,” according to meeting minutes released last week.

Economists said Thursday’s data generally supported their view that inflationary pressures are gradually picking up.

But a key question going forward is how far the Trump administration will take its escalating trade dispute with China. The White House, which imposed tariffs on $34 billion of Chinese exports of industrial goods like auto parts and electronic components, said this week it would assess 10% tariffs on an additional $200 billion in Chinese consumer goods.

The impact of those tariffs, should they take effect, won’t be negligible, economists say.

Ian Shepherdson,

chief economist at Pantheon Macroeconomics, said the goods subject to the proposed tariffs account for almost 6% of the core CPI, meaning that a 10% levy would lift the index by up to 0.6 percentage point.

“The Fed can’t stand back and ignore a hit of this size, given the tightness of the labor market,” Mr. Shepherdson said in a note to clients dated Thursday. “People will seek to be compensated for the squeeze on their real incomes as a result of higher prices, and their chance of being able to force employers to pay up is better now than at any time since the crash.”

Write to Paul Kiernan at paul.kiernan@wsj.com

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