Fed’s Favored Price Gauge Rises at Mild Pace, Spending Holds Up

 

The Federal Reserve's preferred measure of underlying US inflation rose at a moderate pace in June, while consumer spending remained resilient. These indicators provide encouraging signs for officials aiming to cool inflation without causing economic harm.

Key Points:

• Core Personal Consumption Expenditures (PCE) Price Index:

  • Increased by 0.2% from May.
  • Rose 2.6% year-on-year, according to the Bureau of Economic Analysis.
  • On a three-month annualized basis, core inflation cooled to 2.3%, the lowest since December.

• Consumer Spending:

  • Inflation-adjusted consumer spending increased by 0.2%.
  • May’s consumer spending increase was revised higher.

• Market Reaction:

  • Treasuries rallied.
  • Stock futures remained higher as the inflation data matched expectations.

• Fed's Tightening Campaign:

  • The data suggests the Fed's efforts to manage inflation are working without significantly harming the economy.
  • The Fed is expected to keep interest rates unchanged at their upcoming meeting.
  • Investors are betting on a potential rate cut in September.

Additional Insights:

• University of Michigan Sentiment Index:

  • Consumer sentiment fell to an eight-month low in July, indicating that despite cooling inflation, prices remain high, affecting consumer mood.

• Services Inflation:

  • Services inflation excluding housing and energy increased by 0.2% for the second consecutive month.
  • Inflation-adjusted spending on services and merchandise both rose by 0.2%.
  • Housing, utilities, vehicles, and recreational items led the increases.

• Labor Market and Wages:

  • Wages and salaries rose by 0.3% in June, half the pace of the prior month.
  • Inflation-adjusted disposable income growth slowed to 0.1%.
  • The saving rate fell to 3.4%, the lowest since December 2022, indicating reduced consumer firepower for future spending.
  • A Philadelphia Fed report highlighted rising credit card delinquencies.

• Outlook:

  • Additional data, including the government's monthly employment report, will provide further insights into income growth.
  • According to Bloomberg Economics, consumer spending is expected to slow further in the second half of the year as income growth slows and the labor market cools.

Conclusion: The latest data on core PCE prices and consumer spending offer evidence that the Federal Reserve's tightening measures are making progress in controlling inflation without significantly damaging the economy. This has bolstered investor confidence in potential interest rate cuts starting in September, provided further data supports the trend.