Core PCE Data Shows Inflation Cooling

On August 30, the U.S. Department of Commerce released personal consumption expenditures (PCE) price index data for July. Data show that the annual growth rate of the PCE price index in July was 2.5%, slightly lower than the market expectation of 2.6%, and the same as the previous value; the monthly growth rate was 0.2%, in line with market expectations, and slightly higher than the previous value of 0.1%.

The annual growth rate of core PCE, which excludes energy and food prices that the Fed focuses on, was 2.6%, lower than market expectations of 2.7%, but consistent with the previous value; the monthly growth rate was 0.2%, in line with market expectations, and the same as the previous value.

Income Growth Slower Than Expenditure, Savings Rate Falls

Data showed that personal expenditures increased by 0.5% monthly in July, in line with market expectations and higher than the previous value of 0.3%. After adjusting for inflation, the monthly growth rate of personal expenditures in July was 0.4%, higher than market expectations of 0.2% and higher than the revised 0.3%.

The monthly growth rate of personal income rose to 0.3% in July from 0.2% in May, higher than market expectations of 0.2%, but there was almost no significant growth for the second consecutive month.

Meanwhile, the savings rate fell to 2.9% in July, down from 3.1% in June. This is the first time since the COVID-19 epidemic that it has fallen below 3%, and it is also the second lowest level since 2008. The data comes against the backdrop of eight consecutive months of government subsidy increases, but still shows consumers' cash flows are under pressure.

Rate Cuts Expectations Increase, Economic Activity Slows

While July spending, income and inflation data were in line with or slightly better than expected, report details suggested economic activity may be slowing.

According to data from CME Group FedWatch, the market expects a 67.5% probability that the Federal Reserve will cut interest rates by 25 basis points in September, and a 32.5% probability of a 50 basis point interest rate cut. The market expects that interest rates may be cut by 25 basis points in a row at the November and December meetings.

Diane Swonk, chief economist at KPMG, said that the cooling of inflation has eliminated the trend of rising again at the beginning of the year, which is a positive signal, and the focus will turn to changes in the job market in the future.