PCE Data—the Fed’s Top Focus—Came In Positive: Analysts Weigh In

In the U.S., the personal consumption expenditures (PCE) price index showed a limited decline in June, but inflation remained above the Fed’s 2% target. The strong recovery in consumer spending in the second quarter indicated that the U.S. economy remains resilient despite high interest rates and rising energy prices.

According to data released by the U.S. Commerce Department, consumer spending, one of the economy’s most important drivers of growth, increased by 3.2 percent on an annualized basis in the second quarter of the year. Spending had grown by only 0.5 percent in the first quarter.

Core PCE inflation fell from 3.4 percent in June to 3.3 percent. While this decline is seen as a positive signal for Fed officials, the fact that price increases remain significantly above the central bank’s target has led to continued uncertainty regarding monetary policy.

Federal Reserve Chairman Kevin Warsh said at a press conference yesterday that monetary policy decisions will focus not only on PCE data but also on a broader set of inflation indicators. Warsh also added that the US economy remains resilient.

Economists say a renewed surge in energy prices is one of the most significant risks facing the US economy in the second half of the year. A renewed acceleration in oil prices and strengthening inflationary pressures could push the Fed to further tighten monetary policy.

The high inflation environment is also causing consumers to be more sensitive to product prices. Procter & Gamble Chief Financial Officer Andre Schulten stated that consumers are acting cautiously but spending remains stable, adding that every consumer is focused on getting value for their money.

Citigroup economists Andrew Hollenhorst and Veronica Clark stated that Warsh’s placing more weight on inflation indicators other than PCE could reduce the likelihood of an interest rate hike in the near term.

Economists noted that the core consumer price index is at 2.6 percent, closer to the Fed’s 2 percent target than the core PCE. Hollenhorst and Clark stated that the broader indicators Warsh follows may more clearly show that there is no alarming acceleration in inflation in the coming months.

Markets are currently pricing in a 59% probability of the Fed raising interest rates in September. However, Citigroup economists believe this expectation may be too high and that a new rate hike may not happen in the near future.

*This is not investment advice.