PCE Index Shows Cautious Consumers; Low Inflation Gives Hope for Rate Cut

The consumer showed up with caution in May, but a low inflation rate added some fuel to the arguments for an interest rate cut. Those were the mixed messages sent from the Bureau of Economic Analysis report released Friday (June 28) on personal income and outlays.

According to the report, personal income rose by 0.5%, or $114.1 billion, with disposable personal income (DPI) also increasing by 0.5%, reflecting a $94.0 billion gain. However, personal consumption expenditures (PCE) grew at a more modest rate of 0.2%, or $47.8 billion, indicating cautious consumer spending. The PCE price index, a key measure of inflation, decreased slightly by less than 0.1%. Excluding the volatile food and energy sectors, the core PCE price index experienced a small increase of 0.1%. This suggests that while overall inflation remains under control, core inflationary pressures are still present but subdued.

The PCE price index measures the average increase in prices for all domestic personal consumption. It is considered a comprehensive indicator of inflation because it includes various goods and services and adjusts for changes in consumer behavior. Essentially, it reflects how much more (or less) consumers are paying for the same items compared to previous periods. Real DPI, which adjusts for inflation, saw a 0.5% increase, while real PCE rose by 0.3%. Detailed spending data revealed a 0.6% rise in goods purchases, particularly durable goods such as recreational products. In contrast, service spending saw a more modest increase of 0.1%, driven primarily by healthcare, housing and transportation services.

On a year-over-year basis, the PCE price index increased by 2.6%, with food prices rising by 1.2% and energy prices by 4.8%. The core PCE price index, which excludes food and energy, also increased by 2.6% over the past year.

The relatively low inflation rate gave hope to venture capitalists and economists who have looked to the Fed to cut interest rates. The Fed held rates steady at its meeting two weeks ago, but the report issued today was viewed by many as the positive dynamic that could move it to consider a cut.

“Our current policy is well positioned to respond as needed to any changes in the economic outlook,” Federal Reserve Governor Lisa Cook said earlier this week. “With significant progress on inflation and the labor market cooling gradually, at some point it will be appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy,” she said, adding “the timing of any such adjustment will depend on how economic data evolve and what they imply for the economic outlook and balance of risks.”

Sector-Specific Spending Trends

The BEA report showed spending saw notable contributions from nondurable goods, especially prescription drugs, despite a reduction in spending on gasoline and energy. Durable goods spending was led by recreational products and motor vehicles. The increase in prescription drugs spending indicates a sustained demand in the healthcare sector.

Service spending was predominantly driven by healthcare services, highlighting ongoing medical needs and possibly higher healthcare costs. Housing services also contributed significantly, reflecting stable housing market conditions. Transportation services saw a boost, likely due to increased travel and mobility as pandemic-related restrictions continue to ease.

Entertainment and recreation services also saw growth, indicating a resurgence in consumer interest in leisure activities. However, spending on utilities and financial services showed little change, suggesting stability in these sectors.

Most analysts took the report as an indication of a stable economic environment with modest growth in personal income and controlled inflation. The slight decline in the PCE price index suggests potential deflationary trends that warrant attention. Seema Shah, chief strategist at Principal Asset Management, told CNBC: “The latest data show inflationary pressures are easing, but the risk of deflation cannot be ignored.” This aligns with the moderate growth in PCE reported by the BEA.