US core inflation shows stability

The PCE inflation report is 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. The employment report as the next important hurdle in assessing the likelihood of a September rate hike.

"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 is also expected to move higher, reaching 1.1% by the end of 2015 from the current 0.3% reading", says Barclays. 

The report also contained 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. Our expectation has been that 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. 

"This forecast assumes a modest further decline in the saving rate in the coming quarters, which is a supporting factor in our outlook for consumption spending through year-end", added Barclays.