Inflation remained stubborn in July, but consumers got something they have not always had during the recent run-up in prices: income growth that gave them more purchasing power without prompting another burst of spending.
The Personal Consumption Expenditures (PCE) price index rose 0.2% in July from June and 3.7% from a year earlier, the Bureau of Economic Analysis reported Wednesday (Aug. 26). Core PCE, which excludes food and energy, also rose 0.2% for the month and 3.3% from a year earlier. Both annual inflation rates were unchanged from June.
That leaves inflation elevated, but July didn’t bring another acceleration. The more revealing change came in what consumers did with their money.
Personal consumption expenditures increased $36.3 billion, or 0.2%, in current dollars. After adjusting for prices, spending increased by less than 0.1%, which BEA rounds to 0.0%. That was a sharp slowdown from June, when real PCE increased 0.4%.
The spending mix is showing a shift in terms of categories. Services spending increased $86.2 billion in July, while spending on goods fell $49.9 billion. In other words, services more than accounted for the entire increase in consumer spending, with the decline in goods offsetting much of that gain.
The biggest dollar increases came from financial services and insurance, healthcare, housing and utilities, and other services. On the goods side, spending declined on gasoline and other energy goods, recreational goods and vehicles, motor vehicles and parts, other nondurable goods, furnishings and food and beverages. Clothing and footwear posted a small increase.
The inflation-adjusted figures reinforce that divide. Real goods spending fell 0.6%, including a 1.4% decline in durable goods. Real spending on motor vehicles and parts fell 1.6%, while recreational goods and vehicles dropped 2.9%. Real services spending rose 0.3%, including gains in transportation, healthcare and food services and accommodations.
Income Gives Consumers More Room
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The income side of the report keeps July from looking like a broad deterioration in household finances.
Personal income rose 0.4%, while disposable personal income, what households have available after taxes, increased 0.5%. After adjusting for inflation, disposable income rose 0.4%. The personal saving rate increased to 3% from 2.7% in June.
That means there was no July gap in which inflation outran disposable income. Purchasing power increased while real consumption barely changed.
The figures instead suggest that households, in aggregate, did not spend the additional income as quickly as they received it. That is a one-month observation, not evidence that consumers have stopped spending: real PCE remained 2.4% higher than a year earlier.
The latest PYMNTS Intelligence data add another dimension to that picture by showing where household budgets are feeling pressure.
The August Paycheck-to-Paycheck Report found that consumers were much more likely to identify everyday expenses than discretionary summer purchases as sources of financial pressure. Groceries were cited by 53%, utilities by 45% and gas or transportation by 36%. Travel was cited by 19%.
The findings prove helpful in explaining why improving aggregate purchasing power can coexist with financial strain among individual households. PYMNTS Intelligence found that 14% of consumers who began the summer outside the paycheck-to-paycheck economy had moved into it during the season.
The July PCE report doesn’t show consumers being overwhelmed by inflation. Income rose, purchasing power improved and saving increased. But neither does it show consumers using those gains to accelerate purchases across the economy.
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