Michelle ThompsonIncreasing gasoline prices contributed to an uptick in overall inflation last month, but there’s some positive news for the Federal Reserve. The core Personal Consumption Expenditures (PCE) index, a closely monitored measure of inflation that excludes gas and food prices, registered a 3.9% increase for the 12 months ending in August. This represents the lowest annual rise in the index over the past two years, aligning with the Fed’s target of 2% inflation, as per data from the Commerce Department released on Friday.
Furthermore, on a monthly basis, core PCE showed a modest growth of 0.1%, marking its slowest month-on-month increase since a 0.3% decline observed in April 2020.
“In terms of inflation, it’s an overall positive report for those looking for progress in the Federal Reserve’s efforts to reach the 2% target,” stated Andrew Patterson, a senior economist with Vanguard, in a comment to CNN.
Since March 2022, the U.S. central bank has raised the federal funds rate to its highest level in decades as part of its strategy to combat the highest inflation rates witnessed in over 40 years.
The comprehensive PCE index, which encompasses the more unpredictable food and energy sectors, exhibited a 0.4% increase from July and an annual increase of 3.5%. This represents an acceleration compared to the respective rates of 0.2% and 3.4% observed in July. Nonetheless, this acceleration was widely anticipated, as gas prices surged last month. The report highlights that energy goods and services prices experienced a 6.1% rise in August compared to July.
Economists had anticipated that the headline PCE index would increase by 0.5% on a monthly basis and by 3.5% annually, as per Refinitiv’s estimates.
The ongoing increase in energy costs may sustain upward pressure on inflation. Earlier this month, oil prices experienced further surges following announcements by Saudi Arabia and Russia about extending production cuts.
Andrew Patterson commented on this, stating, “Energy prices eventually affect all other expenses. This is certainly a concern for the Fed. We do not want to witness a prolonged period of $90 per barrel oil prices.”
Consumers are still making purchases, but they are spending less on their purchases.
The Commerce Department’s latest report on Personal Income and Outlays also indicates that consumer spending moderated in August, increasing by 0.4%, compared to the revised 0.9% growth seen in July. Meanwhile, incomes saw a 0.4% boost.
Additionally, the personal saving rate, which measures savings as a percentage of disposable income, declined for the third consecutive month, dropping to 3.9% from the upwardly revised 4.1% recorded in July. This means that savings are now at their lowest level since December of the previous year.
These findings suggest that Americans’ financial reserves are decreasing just as economic challenges are becoming more pronounced.
Credit card debt is accumulating at a time when interest rates are historically high, leading to concerns. Delinquencies on credit card payments are on the rise, and the labor market is showing signs of slowing down, while wage growth is also moderating. These factors collectively contribute to a challenging financial landscape for many individuals.
Dana Peterson, the chief economist for the Conference Board, pointed out that a combination of factors is converging to create what they believe will be a significant slowdown in consumer spending. In an interview with CNN, she mentioned that consumer confidence recently dropped to its lowest level in four months, as reported by the Conference Board earlier this week.
Furthermore, in just a matter of days, student loan payments will resume after years of forbearance. Peterson highlighted the impact this will have on individuals aged 45 and under, who are typically in their peak earning and spending years. She explained that the return of these payments will reduce discretionary income and delay important life milestones such as buying a home, purchasing a car, or saving for retirement.
In summary, these factors are gradually undermining the strength that consumer spending exhibited over the past year.
The final document preceding a period of data unavailability?
The monthly Personal Income and Outlays reports from the Commerce Department are usually closely monitored because they offer a thorough overview of pricing, income, and spending information. Nevertheless, this Friday’s report might have added importance. In the event of a government shutdown beginning on October 1, this report from the Commerce Department could be the final significant federal economic data release until funding negotiations are resolved.
In a crucial moment for the economy, Americans, economists, the financial markets, and notably, the Federal Reserve, may find themselves operating with limited information if a government shutdown occurs.
Should a shutdown happen, some of the initial casualties would be vital labor market data reports, specifically the August Job Openings and Labor Turnover Survey, scheduled for release on Tuesday, and the September jobs report set for Friday. According to the Department of Labor’s contingency plan, all 2,350 employees of the Bureau of Labor Statistics would be temporarily furloughed.
Depending on the duration of the shutdown, this could potentially impact other important reports from the BLS, including the Consumer Price Index, the Producer Price Index, Real Earnings, and the US Import and Export Price Indexes. Delayed CPI data, for example, could affect the Social Security Administration’s planned 2024 Cost of Living Adjustment, as highlighted by Labor Department officials.
Furthermore, a government shutdown could also jeopardize the timely release of essential housing and auto sales data, Census Bureau information, Personal Consumption Expenditures (PCE), and Gross Domestic Product (GDP) reports, among others.
As Joseph Patterson of Vanguard noted, the coming fall and winter were expected to provide a clearer understanding of inflation and labor market trends, potentially influencing policy decisions by the Fed. However, without access to this data or with delays, the ability to interpret the economy’s direction could be compromised.
