To keep up progress on PCE inflation, spending will have to cool

Summary

Today's report on June personal income and spending is the last major indicator before next week's Fed meeting and while there is plenty to unpack, there is nothing that compels a rate cut at the July meeting or that prevents one in September.

Inflation cooling, spending is not

Today's consumer numbers may not be quite as reassuring to those hoping for Fed rate cuts as they first appear. The monthly gains in the headline (+0.1%) and core (+0.2%) PCE deflators offer further evidence that inflation is tracking toward target, but services spending is still too strong.

At the start of this year, brisk spending gave businesses little incentive to think twice about raising prices. But consumer spending has downshifted, if only incrementally. Consumer companies have reported how buyers are becoming more selective and price sensitive; there are some indications of that in the economic data, but it is not the slam-dunk case that is so frequently articulated in earnings announcements. One place where it is easy to spot is big-ticket durable goods items where purchases often require financing. Real durable goods spending fell 0.2% in June and is now down in two out of the past three months. Durable goods weakness in the latest month can be attributed to a 2.6% decline in outlays on motor vehicles.

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