Personal income grew 0.2% month-on-month (m/m) in July, which was below market expectations for a gain of 0.3%. This marked a slight deceleration from the prior month’s 0.3% gain. The increase primarily reflected a rise in compensation to employees that was partly offset by a decrease in personal current transfers.
Accounting for inflation and taxes, real personal disposable income fell -0.2% m/m, relative to the flat figure recorded the previous month.
Personal consumption expenditures rose 0.8% m/m, accelerating from the upwardly revised 0.6% posted in June (previously 0.5%). July’s reading came in just above market expectations for 0.7% growth.
- Expenditures on services grew 0.8% m/m, up from 0.6% in June. Spending on financial services and insurance, housing and utilities, food services and health care were the primary contributors to movements in the services category.
- There was also an increase in goods spending. Goods spending rose by 0.7% m/m, an acceleration from the 0.6% posted in June. Both durables and non-durable goods spending advanced by 0.7% on the month.
Adjusting for inflation, real spending grew 0.6% for the month, coming in just above the consensus estimate for a 0.5% gain. In real terms, goods spending was up 0.9% m/m, while services were up 0.4%.
The personal consumption expenditure (PCE) price deflator rose 0.2% m/m, and 3.3% on a year-on-year (y/y) basis – bang-on the consensus forecast (3.3% y/y) but above June’s reading (3.0% y/y).
The core PCE price deflator (which excludes food and energy and is the Fed’s preferred measure of inflation) rose 0.2% m/m for the second consecutive month and was in line with the consensus forecast. On an annual basis, core PCE inflation accelerated to 4.2% y/y from 4.1% y/y the month prior.
The personal savings rate fell to 3.5% in July, down 0.8%-pts from June’s reading of 4.3%. This is the first time the measure has fallen below 4% since the start of the year.
Key Implications
With the labor market slowly coming back into better balance, easing wage pressures helped to cool income growth last month. However, with excess savings still available, U.S. households were able to keep spending, resulting in a pullback in the personal savings rate. July’s personal consumption expenditure number provided a solid start to Q3, with real PCE expected to accelerate from 1.7% annualized in Q2 to 4% in Q3.
As the Fed chair reminded us at the Jackson Hole Symposium last week, the fight against inflation is far from over. Today’s core PCE inflation reading brought that back into focus with the measure still notably above the Fed’s 2% target. Recent labor market data suggest things are cooling, which should continue to ease wage pressures and lead to further downward pressure on inflation. Should this trend persists, it will abate the need for further rate increases. The Central Bank will have more opportunities to gauge the temperatures of both inflation and the labor market before the September meeting, but current market pricing suggests the Fed will skip the September meeting but potentially hike in November should the data continue to surprise to the upside.
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