US Consumer Remains Stable, While PCE Inflation Softens

The US inflation continues to head in the right direction as the PCE report showed today, helping along the US consumer. Monthly core  PCE inflation came below 2%, while both earnings and spending increased by a decent pace, showing that consumption remains strong and will grow as earnings grow.

The July Core Personal Consumption Expenditures (PCE) data indicates that inflation remains relatively steady, with the core PCE year-over-year figure holding at 2.6%, slightly below the expected 2.7%. This steadiness suggests that inflationary pressures are not accelerating, providing some relief to markets and policymakers concerned about potential overheating in the economy. The month-over-month core PCE came in as expected at +0.2%, highlighting a stable trend in core inflation.

Headline PCE inflation also showed a slight cooling, coming in at 2.5% year-over-year, below the anticipated 2.6%. This data implies that overall price increases are moderate and aligned with expectations, likely reinforcing the Federal Reserve’s cautious approach to rate adjustments.

On the consumer side, personal income rose by 0.3%, slightly ahead of the forecast, indicating continued wage growth. Personal spending increased by 0.5%, showing that consumers remain active, supporting economic growth. The rise in real personal spending to 0.4% from the prior 0.2% further underscores the strength in consumer demand, a critical component of the US economy.

US PCE, Personal Income and Personal Spending Report for July 2024

US July Core PCE Data:

• Core PCE Price Index (Year-over-Year): +2.6%, slightly below the expected +2.7%, unchanged from the prior +2.6%.
• Core PCE Price Index (Month-over-Month): +0.2%, in line with expectations (unrounded: +0.161%). The previous month was also +0.2%.
• Headline PCE Inflation (Year-over-Year): +2.5%, just under the forecast of +2.6%, same as the prior +2.5%.
• PCE Deflator (Month-over-Month): +0.2%, matching expectations (unrounded: +0.155%). The prior month was +0.1%.

Consumer Spending and Income for July:

• Personal Income: +0.3%, exceeding the expected +0.2%, compared to the prior month’s +0.2%.
• Personal Spending: +0.5%, in line with expectations, higher than the previous month’s +0.3%.
• Real Personal Spending: +0.4%, up from the prior month’s +0.2%.

These figures lean toward the softer side, highlighted by the headline missing expectations and the unrounded monthly PCE being closer to 1% rather than 3%. As a result, the US dollar dipped slightly against a few currencies, but the fluctuations were minimal. Overall, this report indicates continuous progress in controlling inflation, which gives the Federal Reserve the go-ahead to consider lowering interest rates.

The likelihood of a 50 basis point rate cut by the FED now stands at 29%, a bit lower than it was prior to the release of the inflation data. However, the final decision will also hinge on next week’s non-farm payroll (NFP) numbers, which could provide further insights into the labor market’s strength. Additionally, other economic indicators, such as retail sales and manufacturing data, will likely influence the Fed’s decision-making process.