Personal consumption expenditures rose at a 0.3% pace between May and June after adjusting for inflation. That matched the pace of inflation-adjusted disposable income growth. The saving rate held at 6.8%; it was revised up with annual data revisions in response to proprietors underreporting income.
Gains in spending were driven by an increase in spending on services. Discretionary spending on food and accommodations was particularly strong, signaling the start to a much stronger summer vacation season than we have seen in recent years. Those gains are likely to continue into July. Anecdotal reports from airlines suggest air travel during the Fourth of July holiday week was the strongest on record.
Vehicle sales were robust in June. SUVs continue to sell well. We know there were some vehicle producers who attempted to hedge against the threat of vehicle tariffs with a surge in imports from countries that could be affected by new tariffs. At least a portion of those shipments likely showed up in fleet sales. The threat of vehicle tariffs appears to have temporarily abated but, as we have seen, trade talks are notoriously unpredictable.
The personal consumption expenditures (PCE) deflator rose a moderate 0.1% in June. The Federal Reserve watches the PCE in targeting inflation as it is one of the most accurate measures because it accounts for how consumers make tradeoffs when the price of one type of good suddenly increases sharply. Year-over-year price changes held at a 2.2% pace, slightly above the Fed’s 2% target. The core PCE, which strips out the more volatile food and energy components, rose 0.1% for the month and 1.9% compared to one year ago. Fed officials have made clear that rate hikes will be gradual (two more this year) as long as inflation remains close to the 2% target.
The Fed is widely expected to conclude a two-day meeting, starting today, with a statement that signals another increase in September. The Federal Open Market Committee (FOMC) will acknowledge the progress the economy has made in recent months, including the second quarter rebound in growth. Members will welcome the warming trend in inflation as a positive development. The Fed has cautioned, however, that a tariff-induced rise in inflation would be less welcome, especially in light of the impact that tariffs tend to have on wages in the aggregate; tariffs act as a tax on consumers.
A surge in paychecks is offsetting some of the ongoing weakness in wage gains and allowing more consumers to relax a bit and kick up their heels. Even workers with fewer skills are finally seeing a chance to participate and get jobs in this environment. The last shoe to fall is for wages to finally accelerate.
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