Inflation's rise is still at 40-year highs, the Fed's preferred rate says

Consumer spending slowed down in the second quarter, while sentiment is still at all-time lows.

inflation text with maginifier

Inflation in focus. (Photo by Flickr user Jernej Furman, obtained under a Creative Commons license.

On a busy week of economic data, here's a look at what we learned as the reporting cycle examining June drew to a close:

PCE Price Index still rising

Friday's release of an inflation measure preferred by economic policymakers at the Federal Reserve showed the same result as the more widely-tracked Consumer Price Index for June: A new 40-year high.

The Personal Consumption Expenditures (PCE) price index increased 6.8% year-over-year in June, according to data released Friday by the US Commerce Department.

That’s above the 40-year-high of 6.3% set in March. Like the Consumer Price Index, the comparison point dates back to the midst of the country’s bout with inflation in the late 1970s and early 1980s. It's just shy of the 6.9% rate set in January 1982.

When factoring out typically-volatile food and energy prices, the inflation rate was 4.9% year-over-year, according to the Commerce Department.

When it comes to month-over-month comparisons, the change of 1% to the overall index was the highest since 1980. The 0.6% change in prices excluding food and energy was the highest since October 2001.

Price increases were present across categories, including food, furnishings and clothing and footwear.

a graph showing personal income, outlays and spending.

A look at PCE data from June 2022. (Source: US Commerce Department)

Meanwhile, consumer spending also rose 1.1% in June when compared with May, with gasoline leading the increase.

Personal disposable income increased 0.7%, according to the Commerce Department’s data. However, the growth has been slowing in recent months, signaling that inflation is taking a toll on available discretionary funds.

The latest readings come just a couple of days after the Fed announced its second interest rate increase of 0.75% in as many months. In raising interest rates, the Federal Reserve is aiming to cool demand in the economy, and bring down inflation. The PCE is the rate used by the Fed to set its target of 2%. But in June, this gauge was trending away from that number.

The Federal Reserve seeks to balance price stability and a healthy labor market, so it also closely tracks wages and compensation to take into account the income that Americans have available to spend. Its preferred measure of this data, which is the US Labor Department’s Employment Cost Index, showed a 5.1% year-over-year increase in June. Wages and salaries also increased, up 5.3%.

Alongside low unemployment, the wage growth signals a strong job market. That has been cited as a good sign for the economy overall, and a key sign that the US may not be in a recession. But when it comes to the Fed’s action to cool the economy, continued rising wages alongside rising inflation can create a cycle that keeps pressure on prices to continue moving upward, as people seek higher compensation to pay for things that are getting more expensive. Adding to the complication, wages were not rising fast enough to keep pace with inflation in June.

While the total raise of 1.5% in a short period is rare for the central bank, the continuing rise of inflation will likely provide more evidence to back up the Fed’s decision. The Fed next meets in September, so a rate hike won’t come before then. While Chairman Jerome Powell said another “unusually large” rate increase may be on the table, he said Wednesday that the Federal Reserve is set to make decisions on further hikes based on the data it receives between meetings. Before it meets again, at least one more inflation and wage reading will be available.

GDP falls for second straight quarter

A look at percentage changes in US GDP. (Source: US Commerce Department)

On Thursday, the latest data on overall US economic activity showed a slowdown for a second straight month.

The US gross domestic product (GDP) declined 0.9% in the second quarter. This followed a decrease of 1.6% in the first quarter, according to the US Commerce Department.

Two straight quarters of negative growth is typically believed to be the economic equation for a recession, but, as CNBC reported, a recession is only official when the National Bureau of Economic Research deems it as such months after the fact.

GDP is the broadest measure of economic activity, with many different factors taken into account from goods to services to government spending. Diving into an area of particular importance for consumer goods and retail, the Commerce Department said an increase in consumer spending for the quarter was driven primarily by services, including food services and accommodations as well as health care. This reflects a shift back to more spending experiences and in-person activities as pandemic restrictions were relaxed in early 2022. Spending on goods, which was far and away the primary focus of consumer dollars for the two years of the pandemic, decreased.

Overall, growth of consumer spending slowed down to 1% from a first quarter uptick of 1.8%.

Consumer sentiment is still at all-time lows

Consumer sentiment continues to be at historic lows. The final reading from the University of Michigan Survey of Consumers for July showed “little change” from the lows in June that, like inflation, are at levels not seen since the 1980s. The one-year outlook fell to its lowest level since 2009, which was the beginning of the last recession.

“This month’s Sentiment Index was the second lowest reading on record, and the Q2 slowdown in personal consumption expenditures was no surprise,” wrote Surveys of Consumers Director Joanne Hsu.

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