Federal Reserve’s Favored Price Gauge Rises at Mild Pace, Spending Holds Up
YEREVAN (CoinChapter.com) — The Federal Reserve’s preferred measure of underlying US inflation rose at a tame pace in June, while consumer spending remained healthy.
The core personal consumption expenditures (PCE) price index, excluding volatile food and energy items, increased by 0.2% from May, according to the Bureau of Economic Analysis (BEA) data released on Friday. Compared to a year ago, the index rose by 2.6%.
Modest Rise in Consumer Spending Driven by Housing and Recreation
Inflation-adjusted consumer spending rose by 0.2% in June. May’s spending increase was also revised higher.
Inflation and Spending Trends. Source: Bureau of Economic Analysis
The spending breakdown shows that outlays for both services and merchandise rose by 0.2%. Housing and utilities led increases in services spending, while vehicles and recreational items propelled advances in goods spending.
Market Rallies on Positive Inflation Data, Potential Rate Cut in September
The release of this data led to a rally in Treasuries and a rise in stock futures. The market’s response suggests confidence in the Federal Reserve’s ability to manage inflation without causing significant economic disruption.
The core PCE inflation reading for May was revised slightly higher but remained at 0.1% on a rounded basis. On a three-month annualized basis, core inflation cooled to 2.3%, the lowest since December.
Economists, including Rubeela Farooqi, Chief US Economist at High Frequency Economics, noted,
“From the Fed’s perspective, cumulatively, we think the data show enough progress—on both inflation and labor market conditions—for policymakers to open the door to a rate cut in September.”
Cooling Labor Market and Rising Financial Strain on Consumers
Signs of cooling in the labor market are beginning to affect purchasing power. Wages and salaries rose by only 0.3% in June, half the pace of the previous month. On an inflation-adjusted basis, disposable income growth slowed to 0.1%.
The saving rate fell to 3.4%, the lowest since December 2022. This decline suggests that consumers may have less financial capacity to sustain high levels of spending in the coming months.
A report from the Philadelphia Fed published earlier in the week indicated that credit card delinquencies are increasing. This further suggests that consumers might be feeling financial strain despite healthy spending figures.
Rising Credit Card Delinquencies. Source: Federal Reserve Bank of Philadelphia.
Analysts Warn of Slowing Income Growth Amidst Continued Consumer Spending
Additional data due next week, including the government’s monthly employment report, will provide further insights into how well income growth is holding up and its implications for consumer spending. Bloomberg Economics analysts Stuart Paul, Estelle Ou, and Eliza Winger commented,
“Details of the Personal Income and Outlays report for June indicate US consumers are getting stretched thin. Though spending continued to grow at a healthy, albeit slower clip, income growth slowed more rapidly. And with the labor market cooling, we think consumption growth will ease further in the second half of the year.”
The BEA report highlighted that inflation-adjusted outlays for services and merchandise each rose by 0.2%. Housing and utilities led increases in services spending, while vehicles and recreational items propelled advances in goods spending.
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