US consumers spend as inflation undershoots Fed target


The Federal Reserve’s most closely watched measure of US inflation remained under the central bank’s target in July, as it wrestled with whether to cut rates further.

The report from the US Department of Commerce showed solid growth in personal spending, which has been the driver of economic growth in the US, in July. In a separate survey, however, consumer sentiment for August dropped precipitously. 

The core personal consumption price index was up 1.6 per cent in July versus the same month last year, as it had been in June, according to the commerce department. It was up 0.2 per cent from the previous month. Core personal consumption is the most important inflation index for Fed policy decisions.

Personal spending adjusted for inflation rose 0.4 per cent in July from June, higher than analyst predictions of 0.3 per cent. The trend was particularly apparent in durable goods, such as washing machines, which rose 1.1 per cent in July.*

On an annual basis, inflation-adjusted growth in spending on services, such as meals and haircuts, dipped to just below 2 per cent growth since last July. Purchases of both durable and nondurable goods, such as shoes or batteries, dipped sharply at the end of last year but have since recovered. 

In contrast, a survey of consumers by the University of Michigan in August showed consumer sentiment at its lowest level during Donald Trump’s presidency, amid concerns about the impact of the trade war. This could indicate lower spending numbers for August, which the commerce department will release on September 27.

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On inflation, the Fed aims at a core PCE target of 2 per cent year-on-year growth, a goal it has had difficulty reaching consistently since the global financial crisis. The index has remained below target for all of 2019, even as wage growth accelerated.

Members of the Fed, including chairman Jay Powell, have spoken this year about the difficulty of reaching their inflation target, a problem shared by central bankers in Europe and Japan.

But with the central bank searching for new signals to inform monetary policy, after its single quarter-point cut in the fed funds rate in July, Friday’s data were inconclusive overall, and market reaction was muted.

The policy-sensitive two-year Treasury bill yield was steady at 1.53 per cent. The dollar was largely unchanged. 

The 10-year inflation break-even rate, a market measure of inflation expectations derived from inflation protected Treasuries, rose after the data release to 1.59 per cent. Earlier this week, it had sunk to just 1.54 per cent. 

According to futures prices compiled by Bloomberg, traders are pricing in a 93 per cent chance that the Fed will cut its benchmark interest rate by another 25 basis points at its next meeting in September. The remaining 7 per cent are betting on a more aggressive 50 basis point move.

The core index strips out the prices of food and energy, which tend to be more volatile. Including those items, the PCE index rose 1.4 per cent over the year ending in July, up from 1.3 per cent in June.

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*The numbers have been changed from an earlier version to adjust for inflation



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