NEW YORK (MainStreet) Consumers are feeling the pinch at the grocery store, as rising prices, or inflation, starts to become more visible on the Federal Reserve's radar.
Last month, during the July Federal Open Market Committee meeting, the Fed said the chances of inflation staying below the central bank's 2% target has "diminished somewhat."
"Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable," according to the FOMC statement.
The consumer price index (CPI) is up 2.1% over the past year, according to the Bureau of Labor Statistics. The Fed relies more heavily on the other inflation gauge, the Commerce Department's personal consumption expenditure price index (PCE), which has risen 1.5% over the past year, excluding volatile food and energy prices. While the PCE tends to historically run below the CPI, both measures aren't too far away from 2%, causing the Fed to make note of this issue.
High inflation is not only a problem for consumers, but coupled with weak economic growth could result in stagflation, which means consumers are faced with higher prices without seeing an increase in their paychecks.
The Fed's sentiment is different from the June meeting where Fed Chair Janet Yellen called the inflation numbers at the time, which had also increased, "noisy."
"The Fed is in a tough spot right now," says Scott Carter, CEO of Lear Capital. "If they acknowledge inflation, they have no choice but to raise interest, rates and they don't want to now because that could put the economy into a recession."
With short-term interest rates near zero since December 2008, Carter says the combination of inflation and low rates means people wouldn't invest money, since inflation would eat away at their low returns on bonds and other investments.
Regardless of the debate inside the Fed, consumers are the ones bearing the brunt of rising prices. The Bureau of Labor Statistics report said the index for meats, poultry, fish and eggs increased 0.2% in June, though this was the smallest monthly rise since December.
"Food prices rose significantly towards the beginning of the year and have now stabilized, but they haven't been decreasing, which will hurt certain types of consumers," says Chris Christopher, director, U.S. macroeconomics & global consumer at¿IHS Economics. "We could have another spike in meat prices over the next two months, but I don't see this as a worry for the economy overall."
When economists talk about inflation, rising prices is only part of the equation. Rising wages is another factor, as well. The Bureau of Labor Statistic's jobs report last week said average hourly wages rose 2% as of July over the past year http://www.mainstreet.com/article/career/jobs-report-records-jump-unemployment-rate-despite-sixth-straight-month-200000-jobs-a. The Bureau also tracks the employment cost index, which tracks the cost of wages each quarter. The latest reading showed the index rose 0.7% for the second quarter.
"Overall, wages are not growing that strongly and there is a considerable amount of slack in the labor market so we don't expect increased wages to cause upward price pressure," Christopher adds. "A lot of research shows price increases cause wages to increases, but there is debate over which one comes first."
For now, consumers still have to factor in higher prices into their budgets. Aside from food, the index for energy rose 1.6% in June, while the gasoline index jumped 3.3%. This was largely on the heels of tensions in Iraq during that time. Oil price have subsided over the past month, with light crude falling almost 6%.
- Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE http://www.amazon.com/More-Money-Please-Financial-Secrets/dp/0452298431.