The Current, delivered daily.
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 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.
Trending in Economy
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.