US Inflation Cooled While Consumer Spending Picked Up in June

Key US inflation measures continued to cool and consumer spending picked up in June, adding to momentum in the economy ahead of the third quarter.

(Bloomberg) — Key US inflation measures continued to cool and consumer spending picked up in June, adding to momentum in the economy ahead of the third quarter.

The personal consumption expenditures price index rose 0.2% last month from May, Commerce Department data showed Friday. From a year ago, the measure that the Federal Reserve uses to track its 2% inflation goal increased 3% — the slowest pace in more than two years.

The so-called core PCE price index, which economists tend to see as a better gauge of inflation as it strips out the volatile food and energy components, also rose 0.2% from the prior month and was up 4.1% from June 2022.

Consumer spending, adjusted for inflation, increased 0.4% in June — the most since January.

Meanwhile, a quarterly measure of employment costs — also closely watched by the Fed — rose in the second quarter at the slowest pace in two years, according to separate government data out Friday.

While the annual inflation rate remains above the Fed’s target, the sharp slowdown in price and wage growth over the past year adds to hopes that the central bank can tame inflation without causing an economic downturn.

A growing number of economists are rethinking their recession calls in the near-term or even growing confident that the US can skirt one altogether. As inflation cools, a resilient labor market is underpinning the economy.

After the Fed raised interest rates on Wednesday to the highest level in more than two decades, Chair Jerome Powell signaled the central bank’s tightening campaign may be close to an end. Policymakers will have access to multiple economic reports before their next meeting in September.

Another source of good news in the report was in a closely watched measure of services costs closely watched by Fed officials. The gauge that tracks services inflation excluding housing and energy rose 0.2% in June for a second month, according to Bloomberg calculations. The figure was up 4.1% from a year ago, the smallest advance since mid-2022.

A robust labor market continues to offer Americans the power to spend despite tighter financial conditions and still-rising prices. Wage gains have started to outpace inflation, easing the burden of higher costs.

On an inflation-adjusted basis, outlays for goods increased 0.9% — the largest advance since the start of the year and reflecting stronger demand for new trucks. Services spending ticked up 0.1%.

What Bloomberg Economics Says…

“The takeaway for the Fed is clear: Monetary policy will need to remain tighter for longer, setting the stage for slowing growth near year-end.”

— Stuart Paul and Jonathan Church, economists

For the full note, click here

Real disposable income, the main support to consumer spending, rose 0.2%. Wages and salaries, unadjusted for price changes, increased 0.6% in the biggest advance since the start of the year. The saving rate fell to 4.3%.

–With assistance from Kristy Scheuble.

(Adds Bloomberg Economics comment)

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