EconoFACTS

August 30, 2024 | 09:42

U.S. PCE Inflation Tame, Spending Strong in July

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Core PCE inflation, the Federal Reserve’s preferred measure of consumer inflation, was tame and in-line with our forecast at 0.16% in July, unchanged from June’s pace. This was the third consecutive month in which core inflation was somewhat below 0.2% and will give the Federal Reserve an abundance of confidence that inflation is on a downward path toward the 2.0% target. Year-on-year, core inflation remained at a moderate 2.6% as unfavorable base effects kept the measure from improving. The three-month annual core rate is now running at a well-behaved 1.7%, well-below the six-month annual rate of 2.6%. PCE prices overall also increased a tame 0.16% in July, up a touch from June’s 0.06%, though in-line with projections with the year-on-year rate holding at 2.5%. Prices for goods decreased last month, while services and food prices increased 0.2%, and energy prices rose less than 0.1%. This is just what the Federal Reserve wanted to see to pull the trigger on a September rate cut.

Personal spending was robust in July, jumping 0.5% in-line with our forecast and a notable improvement over June’s 0.3% gain. In inflation adjusted terms, personal spending increased a respectable 0.4%, the third consecutive month of strong gains. Real durable goods spending rebounded 1.7% after declining 0.1% in June, while real nondurable goods and services spending increased a moderate 0.2%. On the downside, consumer spending appears to be out-running real income growth and consumers will likely be soon forced to scale-back a bit on their spending plans. The personal saving rate fell two-tenths of a percentage point to 2.9% in July; back in January, it was a healthier 4.0%.

Personal income growth improved to 0.3% in July, somewhat above consensus expectations, and coming off of a lackluster June gain of 0.2%. In inflation adjusted terms, real disposable personal income growth increased a modest 0.1%, making for a prolonged period of pretty disappointing real income gains. The visible slowdown in income growth is bound to catch-up to U.S. consumers’ willingness and ability to spend. That's a big reason for our forecast of weaker consumer spending growth ahead.

Bottom-line, this personal income and spending report was just what the Fed needed to see to further its confidence to start reducing interest rates. Tame headline and core price readings and slowing real disposable income growth should help keep inflation and consumer spending in-check, even as the Fed starts reducing its monetary restriction. The risk of a re-acceleration in inflation is fading fast.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics