PCE Inflation for May Comes in Cool, Keeping Alive Hopes for a September Cut

  • The highly anticipated core PCE inflation reading for May came in at 0.1% (0.08% unrounded), matching expectations, and bringing the YoY rate down to 2.6% from 2.8%, also as expected and the lowest in three years. Meanwhile, the 3-month annualized rate slowed to 2.7%, the lowest since December. Also, the so-called Super Core reading (core services ex-housing) rose just 0.1%, the lowest since August 2023. The cool inflation read follows similar reports from May CPI and PPI and will keep hopes for a September rate cut in play as we move into July and turn our attention to the next inflation read which will be the June CPI report in a couple weeks. Overall PCE was unchanged on the month, as expected, after a 0.3% gain in April. That dropped the YoY rate from 2.7% to 2.6%, also matching expectations.


  • Meanwhile, personal spending for May came in at 0.2% MoM, shy of the 0.3% expectation but better than the downwardly revised 0.1% pace in April.  Real spending (net of inflation) rose 0.3%, as expected, and above the -0.1% pace in April. Recall, the retail sales series disappointed for a second straight month, but the personal spending numbers are more comprehensive capturing more of the services-side of the economy which is where the consumer has been focused lately. So, the supposed demise of the consumer, that was gathering some momentum of late, appears to be a bit overstated given these more comprehensive spending numbers.


  • Personal income for May rose 0.5% MoM, beating the 0.4% expectation, and above the 0.3% gain in April. After a pop of 1.1% in January, income gains have oscillated between 0.3% and 0.5% which works out to a YoY rate just above the 4.1% Average Hourly Earnings gain from the May jobs report. While that may imply some wage-price pressure, it also provides more fuel for consumer consumption in the second half of 2024.


  • Finally, several reports released yesterday pointed to potential signs of weakening that could be a signal of a slowing economy. The third estimate of first quarter GDP was revised a tenth higher to 1.4%, matching expectations, but personal consumption slowed to 1.5% from 2.0% in the second estimate, and that’s down from the first estimate of 2.5%. A 1.5% consumption rate is historically low and with the lower retail sales numbers from April and May heightened concern over the consumer’s health in the second quarter. Currently, expectations are for consumption to run at 2.0% in the second quarter leading to stronger GDP in the 2.0% – 2.5% range.


  • Also from yesterday’s reports, continuing jobless claims rose to 1.839 million which is the highest level since November 2021. In addition, both wholesale and retail inventories rose much more than expected which could signal the consumer is stepping back amid higher prices. Many CEOs, on recent earnings calls, have stated the consumer is getting more discerning on discretionary items and is pushing back more on price hikes. Thus, many companies are returning to discounts and coupons to revive volume sales. For example, McDonald’s has brought back the $5 Happy Meal. That could bode well for future inflation readings. Housing too struggled in the latest reports with new home sales below expectations, and that followed disappointing existing home sales for May along with starts and permits. It seems the combination of 7% mortgage rates and high prices are keeping buyers in check as the summer selling season arrives.

PCE and Core PCE Inflation Both at 2.6% YoY

Source: Bloomberg



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Published: 06/28/24 Author: Thomas R. Fitzgerald