The Federal Reserve’s favorite inflation gauge showed prices took a breather last month as fuel costs continued to fall from record highs.
The personal consumption expenditure price index rose 6.3% for the year to July, down from 40-year high of 6.8% recorded in June, according to data published by the Bureau of Economic Analysis. On a month-to-month basis, the PCE price index fell 0.1%.
Excluding more volatile food and energy prices, the core PCE index rose 4.6% from a year ago, the smallest annual increase since October 2021.
“What we saw today undid that big upside surprise in July, where inflation is now back to where it was in May,” said Scott Brave, chief consumer spending economist for Morning Consult. “And it’s still more than 6%. It’s still way too high for the Fed, that’s for sure.
And on Friday, during a brief speech at the Fed’s Annual Jackson Hole Symposium in Wyoming, President Jerome Powell said so.
“While the weaker inflation readings for July are welcome, the single-month improvement is well below what the committee will need to see before we are confident inflation is coming down,” Powell said. . “We are deliberately moving our policy to a level that will be restrictive enough to bring inflation down to 2%.”
The cooling of the PCE was widely expected because the July Consumer Price Index, another significant barometer of inflation, also showed a slowdown in price increases. The most significant change: energy prices dropped significantly last month.
The latest data from the BEA reflects this drop. In June, energy prices rose 43.4% compared to the same period a year ago. Last month, that annual gain was 34.4%.
Lower gasoline prices helped lift consumer sentiment, to new data released Friday by the University of Michigan; however, optimism about the overall economy remained at historic lows.
While U.S. consumers enjoyed a welcome reprieve at the pump in July, inflation still remains uncomfortable, especially for low- and middle-income Americans, Brave said.
“The pressure is building over time here on household budgets,” he said. “And real incomes, inflation-adjusted incomes, still aren’t growing really that strongly. This puts pressure and forces you to make difficult decisions.
The personal savings rate as a percentage of disposable income remained at 5%, its lowest position in more than 13 years.
Real personal disposable income edged up 0.3% from June, but remains down 3.7% on an annual basis, according to BEA data. Consumer spending also edged up, up 0.2% for the month, adjusting for inflation.
While much of the current wave of spending has been on services — as people can vacation and eat out after being restricted during the pandemic — some of those July dollars have gone to categories of durable goods such as cars, furniture and leisure. equipment.
The strength of this type of spending, however, is likely to decline in the coming months, Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a note released Friday.
“We are still not looking for spending on durable goods to drive consumption going forward,” they wrote. “The cost of financing these big-ticket items is expected to rise with Fed rate hikes.”