Stale Relief

Price pressures abated in the US last month, key data out Friday showed.

The news was welcome, but expected. It felt stale, and not just because the numbers reflected July’s developments.

Headline PCE prices rose 6.3% YoY last month, less than forecast. The 4.6% core print was the coolest of 2022.

As the all-too-familiar figure (above) makes clear, calling these readings a “game changer” is a ludicrous stretch. Consensus expected 6.4% from the 12-month PCE print and 4.7% from core.

Fed officials spent the two weeks since July’s cooler-than-expected CPI report emphasizing that one month isn’t even close to sufficient when it comes to declaring victory over inflation. If anything, policymakers are more determined than ever after the market reaction to the first evidence of receding consumer price growth worked to ease financial conditions, at cross purposes with the Fed’s goals.

That said, a reprieve is a reprieve, I suppose. The MoM prints were benign. The headline gauge actually fell in July from June, the first monthly decline of the pandemic era (figure below).

Core prices rose just 0.1% MoM, the most benign read since November of 2020.

Needless to say, the relief was brought to you by energy prices, which fell 4.8%, among the largest monthly declines in a decade. Food prices, by contrast, rose 1.3%. On a 12-month basis, food rose nearly 12%, and energy more than 34%.

Personal spending fell well short of consensus. The 0.1% gain missed the lowest estimate from five-dozen economists. The range was 0.2% to 1.1%. Goods spending dropped nearly $10 billion, which in this case is a good thing (no pun intended) given that the leading contributor to the decline was gasoline and other energy. Real personal spending rose 0.2%, just half of the expected advance.

Higher spending on services was led by housing and utilities.

Incomes disappointed. The 0.2% gain for July undershot the lowest guess from economists and was just a third of consensus. The savings rate held steady from June, but at 5%, it sits at the lowest since 2009. Real disposable personal income rose slightly after two consecutive monthly declines, but it’s still deeply negative on a 12-month basis.

Friday’s data reinforced the “peak inflation” narrative assuming you were inclined to buy into it in the first place — and not everyone was, or is. The spending figures can be taken with a grain of salt. The less consumers are compelled to spend on energy the better, so to the extent any weakness is down to lower gas prices, that’s a positive development. But there’s no guarantee that relief will last, and elevated food costs remain an albatross. Weakness in spending that isn’t attributable to lower energy bills is foreboding.

Coming full circle, there wasn’t much new to be gleaned from the numbers. The size of September’s Fed hike doesn’t depend on July’s data, it hangs on this month’s jobs numbers and CPI report.