US clearing another hurdle: Core inflation stable

Headline PCE rose 0.2% m/m, supported by both core and non-core components. Core PCE was up 0.1% m/m (0.148% unrounded), consistent with moderately firming price pressures. Food prices were up 0.3% m/m after declining for the past three months. The energy component was up 1.8% m/m, another solid positive monthly contribution. Compared with a year ago, headline PCE was up 0.3% and core PCE was up 1.3%, both showing somewhat firming price pressures after the softness at the start of the year. 

Core PCE is expected to continue rising from here, albeit at a moderate pace. As core prices rise further and the drag from sharply declining energy prices wanes, headline PCE also expected to move higher, reaching 1.1% by the end of 2015 from the current 0.3% reading. 

"We read the PCE inflation report as suggesting the data have cleared another hurdle for a September rate hike. Committee members have stated over time that rising rates of core inflation are not a precondition to rate hikes. We look to Friday's employment report as the next important hurdle in assessing the likelihood of a September rate hike," notes Barclays.
 
The employment report will contain data on June personal income and spending, the details of which were largely known in the advance release of Q2 GDP last week. Personal income grew 0.4% on the month, with 0.2% growth in wages and salaries supplemented by stronger growth in other categories. Nominal personal spending grew at a solid 5.2% pace in Q2 and, after adjusting for inflation, at 2.9%. The acceleration in personal consumption following the tepid 1.8% pace in Q1 should give the FOMC some comfort that economic momentum will be sustained in the coming quarters. Although the saving rate ticked higher in June, to 4.8% from 4.6% a month earlier, the saving rate of 4.8% in Q2 is lower than the 5.2% in Q1. 

The recent rise in the saving rate would prove transitory and past declines in energy prices and prior wealth accumulation would eventually show up in final consumption. A modest further decline is expected in the saving rate in the coming quarters, which is a supporting factor in the outlook for consumption spending through year-end.