Federal Reserve’s Key Inflation Measure Jumps; Incomes Slow

A Target customer looks at a display of board games while shopping at a Target store in San Francisco, Calif., on Dec. 15, 2022. Justin Sullivan/Getty Images

The Federal Reserve’s preferred inflation indicator climbed, marking the second consecutive inflationary measure to increase in the past month and revealing that the fight against inflation isn’t over. Incomes also slowed while spending surged, suggesting that the U.S. economy could be on the brink of stagflation, an environment of high prices and stagnating growth.

In July, the personal consumption expenditures (PCE) price index rose to 3.3 percent, from 3.0 percent in June and matching the consensus estimate, according to the Bureau of Economic Analysis (BEA). On a month-over-month basis, the PCE rose by 0.2 percent, unchanged from the previous month.

Core PCE, which omits the volatile energy and food sectors, edged up to 4.2 percent year-over-year, from 4.1 percent in the previous month and matching market forecasts. Core PCE also inched higher by 0.2 percent in July, the same as the previous month.

Within the PCE price index, services prices surged by 0.4 percent, and goods prices tumbled by 0.7 percent. Nondurable goods prices were flat.

The PCE is the central bank’s preferred inflation measurement because it’s considered to be more comprehensive than the consumer price index (CPI). The PCE assesses the average change in prices paid by consumers for goods and services, including imports. The CPI monitors price adjustments in a fixed basket of goods and services.

Looking ahead to the next inflation print, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimates that the PCE will surge to an annualized rate of 3.7 percent and climb by 0.6 percent month over month. Core PCE is expected to ease to 4 percent year over year and rise by 0.4 percent at a monthly clip.

Despite the uptick in inflation, the futures market isn’t pricing in a rate hike at September’s policy meeting of the Federal Open Market Committee. According to the CME FedWatch Tool, investors are overwhelmingly anticipating a pause, leaving the benchmark federal funds rate at a target range of 5.25 to 5.5 percent.

However, after new income and spending figures were published on Aug. 31, some economists assert that the U.S. central bank needs to pull the trigger on more rate increases to accelerate the campaign against inflation.

“Consumers spending more and saving less means the #Fed is not making any real progress in fighting #inflation,” Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, wrote on X, the social media platform previously known as Twitter. “Reducing inflation requires consumers to spend less and save more, the opposite of what’s happening. Much larger interest-rate hikes are required to force this change.”

Income, Spending, and Saving

BEA data confirm that personal income rose at a less-than-expected pace of 0.2 percent in July, down from the 0.3 percent bump in June. Real (inflation-adjusted) disposable income slipped by 0.2 percent, and current-dollar personal was flat.

Personal spending in current dollars surged by 0.8 percent, the biggest increase since January and higher than economists’ expectations of 0.7 percent. Real personal spending also rose by 0.6 percent.

BEA figures show that the $153.8 billion increase in personal outlays was primarily driven by a $102.7 billion boost in services, including housing, utilities, food services, health care, accommodations, and insurance. Spending for goods also climbed by nearly $42 billion, with most of the outlays concentrated in food, beverages, and pharmaceuticals.

The personal savings rate came in at a 10-month low of 3.5 percent, down from 4.3 percent in June. That represents the sharpest drop since January 2022.

Research Shows Consumers Struggling

This summer, new research has found that U.S. consumers are still struggling in this inflationary climate despite the current administration’s assertion that its economic plan, dubbed “Bidenomics,” is working.

A new LendingClub-PYMNTS report found that 61 percent of U.S. adults live paycheck to paycheck, up from 59 percent a year ago.

As pandemic-era savings dwindle, more households are turning to credit cards and other lending instruments.

A recent study by economists at the San Francisco Fed forecast that Americans’ excess savings will be exhausted in the third quarter of 2023 as they hold “a relatively small amount” of $190 billion.

“There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023,” the central bank economists wrote.

The report was an update from the San Francisco Fed’s May 2023 study.

In the second quarter, credit card debt surged 4.6 percent to $1.03 trillion, according to the New York Fed’s Household Debt and Credit Report. That’s occurring as the average credit card interest rate has risen to about 21 percent. Other balances, which include myriad consumer loans and retail cards, rose by $15 billion to $530 billion.

In total, household debt surpassed $17 trillion in the April–June period.

Although debt is on an upward trajectory, some experts purport that inflation is making these numbers appear a lot worse than they are. Total credit card debt is 18 percent below its inflation-adjusted peak that occurred in the fourth quarter of 2008, says WalletHub CEO Odysseas Papadimitriou.

“When you account for the massive impact inflation has on balances as well as the fact that debt-to-deposit levels are roughly 50 percent below the peak, U.S. households are actually in a lot better shape financially than it seems at first glance,” Mr. Papadimitriou wrote in a note. “Inflation is masking the fact that people are actually managing their debt better than they have in the past.”

The Landing

So far, the U.S. economy has averted a recession, with the gross domestic product growth rate expanding for four consecutive quarters.

A chorus of economists still anticipates a downturn later this year or in early 2024. While many experts contend that market observers should refrain from focusing on a single month of data, there are growing concerns that the economic landscape could be stalling. But it remains unclear if the country is headed for a hard or soft landing—or no landing at all.

“Simply the resilience of the U.S. economy has been surprising, but a lot of that isn’t that the level of the U.S. economy is so strong, it really is that expectations were very low going into the start of the year,” Ben Kirby, the co-head of investments at Thornburg Investment Management, wrote in a note.

The 12-month recession probability median consensus estimate stands at 60 percent.