Inflation watch: Key US price gauge rises as spending moderates

The personal consumption expenditures price gauge, which the US Federal Reserve uses for its inflation target, climbed 0.4 percent from a month earlier and 4.2 percent from July 2020.

Purchases of goods and services in the United States rose 0.3 percent in July following a revised 1.1 percent increase in June, US Commerce Department figures showed on Friday [File: Juharat Pinyodoonyachet/Bloomberg]

U.S. personal spending growth moderated in July, reflecting a slowdown in outlays for merchandise, while a closely watched measure of inflation remained elevated.

Purchases of goods and services rose 0.3% following a revised 1.1% increase in June, Commerce Department figures showed Friday. The personal consumption expenditures price gauge, which the Federal Reserve uses for its inflation target, climbed 0.4% from a month earlier and 4.2% from July 2020.

The report also showed that income growth accelerated on the heels of an advance disbursement of the child tax credit and a pickup in compensation.

After adjusting for the change in prices, household demand was more muted, suggesting a softer start to third quarter household outlays, a key component of gross domestic product. Real personal spending fell 0.1% in July.

Inflation-adjusted spending on services climbed 0.6% from a month earlier, while merchandise outlays dropped 1.6%, the report showed. While the gain in services reflects a shift in spending for things like travel and entertainment, the rapidly spreading delta variant risks setting back progress in industries hardest hit by the pandemic.

Economists currently project consumer spending to rise an annualized 5% in the current quarter after a robust 11.9% pace in the three months through June, according to Bloomberg survey data.

The median estimates in a Bloomberg survey of economists called for 0.4% increases in both personal outlays and the price index from a month earlier.

U.S. equity futures advanced, Treasury yields fell and the dollar was little changed after the government figures.

Tracking Inflation

The core PCE price index, which excludes food and energy, rose 0.3% from a month earlier after an upwardly revised 0.5% gain in June. The measure was up 3.6% from a year earlier, matching the biggest jump since 1991.

Whether the recent pickup in inflation is transitory — related to the reopening of the economy and supply constraints — or a more permanent trend has been a hotly-debated topic among investors, policy makers and economists.

Personal incomes rose more than forecast, reflecting the distribution of advance child tax credit payments and more compensation. Wages and salaries surged by 1% in July from a month earlier, the biggest gain since November.

Disposable personal income, or after-tax income adjusted for inflation, rose 0.7% in July after declining three straight months.

The saving rate — which has been elevated for months as a result of stimulus checks and enhanced unemployment benefits — rose to 9.6% in July from 8.8%.

Source: Bloomberg