The ever-expanding Trump trade wars have emerged as perhaps the biggest hurdle for the U.S. economy, but rising inflation might still be the biggest threat.
By one measure, inflation is still fairly tame. Hourly wages for American workers only rose slightly in June, keeping the yearly increase in worker pay at a mild 2.7%. Wages typically 3% to 4% a year when the unemployment rate is as low as it now at 4%.
Other yardsticks of inflation such as wholesale and consumer prices have crept not quite into the danger zone, but close enough. The producer price index topped 3% in May and the consumer price index climbed to 2.8% — both six-year highs.
Fresh readings this week are likely to show consumer inflation pushing close to 3% and maybe even hitting the highest level in almost a decade. Rising rents, higher medical costs and a surge in gasoline prices have driven inflation higher over the past year.
Is inflation going to keep rising? Most economists and senior Federal Reserve officials think it will taper off.
Gas prices usually start to ease off near the end of the summer driving season, for one thing.
“Don’t fret about a 3% headline rate — that’s a gasoline story that will at some point run out of fuel,” said senior economist Avery Shenfeld of CIBC Economics.
Rents can’t keep going up forever, either. They’ve climbed so rapidly they are outpacing the ability of tenants to keep up. More housing coming onto the market also ought to reduce the pressure.
Medical care is a wild card. Those costs grew very slowly in 2017, but now are rising again.
The June CPI report comes out Thursday.
For now the Fed isn’t all that worried. The central bank relies more on a separate gauge known as the PCE index that shows inflation to be somewhat lower. The yearly rate was 2.3% in May, just a bit over the Fed’s long-run target of 2%. And the Fed expects that number to recede in the coming months.
Even if the Fed is wrong, though, the intensifying dispute over trade between the Trump administration and other countries is almost certain to prevent the central bank from raising rates even more aggressively to stamp out inflation.
“Fed officials appear to be increasingly concerned about the recent escalation of trade tensions,” noted Andrew Hunter of Capital Economics.