Americans drew down savings to bolster spending in August as households increased outlays on back-to-school spending and services despite a slower pace of income growth.
The personal consumption expenditures index, the Federal Reserve’s preferred gauge of inflation, increased by 2.7% in the top line and by 2.9% in the core on a year-ago basis, according to government data released Friday.
Those increases imply that expectations of a rate cut by the Federal Reserve in October and December should be tempered.
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Inflation dynamics inside the August PCE report illustrated stubborn service sector inflation that increased from 3.5% to 3.6% while goods prices also rose.
Beef and veal costs, for example, increased by 13.9% on a year-ago basis, household utility costs rose by 7%, and the cost of electricity advanced by 6.2%.
The data
Domestic spending increased by 0.6% in August while incomes advanced by 0.4% and the savings rate slowed to a 4.6% increase from 4.8% previously.
Compensation increased by 0.3% and disposable income advanced by 0.4%, while real personal income excluding government transfers was flat and disposable income on an inflation-adjusted basis increased by 0.1%.
Goods prices advanced by 0.9%, durables costs increased by 1.2% and non-durables inched forward at a 0.7% pace, all from one year ago.
Service costs increased by 3.6%, services excluding food and energy by 2.9% and food prices were up by 2.2%.
The takeaway
American consumers increased spending on services following a modest acceleration in services prices and to take advantage of back-to-school sales.
While we are encouraged by the 0.4% increase in incomes, the fact that Americans had to draw down savings is a non-so-friendly reminder that the pace of spending is likely driven by upper-end households while lower-income cohorts remain stressed.
Moreover, inflation dynamics inside the August PCE report illustrated stubborn service sector inflation that increased from 3.5% to 3.6% while one can observe rising goods prices.
Price increases like those will most likely be the focus of U.S. households that are in the process of updating their inflation expectations. And that will be the difference between whether rising inflation linked to policy changes in trade proves transitory or persistent.
