Lower gasoline prices limit American consumer spending, and monthly inflation slams to a halt

The Federal Reserve may not need to give another three-quarters of a percentage point interest rate boost next month because monthly inflation slowed considerably in July despite dropping gasoline prices hurting service station sales.

Even though the Commerce Department’s report on Friday indicated a slight increase in personal income last month, salaries rose significantly. That might support consumer spending and maintain the economy’s modest growth.

Officials at the U.S. central bank are sure to applaud the reduction in inflation. The U.S. will require strict monetary policy “for some time,” according to Fed Chair Jerome Powell, who spoke on Friday at the annual Jackson Hole global central banking conference in Wyoming. Powell made no mention of the potential height of an increase in interest rates before the Fed acts. Since March, the central bank has increased its policy rate by 225 basis points.

Michael Pearce, a senior U.S. economist at Capital Economics in New York, stated, “With gasoline prices on course for an even larger decrease than in July, and rising signals that core goods inflation is stepping down, we anticipate that might clear the way for a lesser 50 basis points boost in September.”

After increasing 1.0% in June, consumer expenditure, which makes up more than two-thirds of all economic activity in the United States, increased by 0.1% last month. Reuters polled economists, who predicted that consumer expenditure would increase by 0.4%.

According to data from motorist advocacy group AAA, the national average gas price fell to around $4.27 per gallon in the last week of July after reaching an all-time high of just over $5 in mid-June.

While that increased disposable income for things like clothing, furniture, leisure items, housing, and utilities, it also decreased service station sales. As a result, after increasing 1.5% in June, spending on goods decreased by 0.2%.

Spending on services increased by 0.3%, with modest increases in spending at bars and restaurants as well as on leisure activities. In June, services spending rose 0.7%.

The economic impact of a steep slowdown in inventory accumulation brought on by supply bottlenecks was lessened in the second quarter thanks in part to a sluggish pace of consumer expenditure. After declining at a 1.6% annualised rate in the first quarter, the gross domestic product shrank by 0.6% last quarter.

Due to Powell’s remarks, stocks on Wall Street fell. In comparison to a currency basket, the dollar decreased. Before settling near two-month highs, the yield on the two-year U.S. Treasury note temporarily spiked to its highest level since October 2007.

Even so, there isn’t a recession right now. According to data released by the government on Thursday, income growth climbed at a 1.4% rate, which was slower than the 1.8% rate recorded in the January-March quarter.

Despite the fact that the Fed’s aggressive tightening of monetary policy has increased the risk of an economic slowdown, if price pressures continue to ease, the Fed may be able to scale back its rate hikes.

At the meeting on September 20–21, the financial markets expect a 75 basis point, or 0.5 percentage point, increase.

After rising 1.0% in June, the personal consumption expenditures (PCE) price index fell 0.1% last month, the first decline since April 2020. The PCE price index rose 6.3% over the previous twelve months, ending in July.

After soaring by 0.6% in June, the PCE price index increased by 0.1% when the volatile food and energy components were excluded, its weakest showing since February 2021.

In July, the so-called core PCE price index had a year-over-year growth of 4.6%. Following a 4.8% increase in June, the weakest yearly growth in nine months occurred.

There was more good news on inflation. Consumer mood data released by the University of Michigan on Friday revealed that families’ expectations for near-term inflation dropped to an eight-month low in August.

The PCE price indexes, along with the consumer price index, are being closely watched by Fed officials.

Even while rental prices have remained high despite a sharp decline in oil prices, some analysts are hesitant to say that inflation has peaked.

According to Will Compernolle, senior economist at FHN Financial in New York, “previous instances of decreasing inflation momentum this past year have unexpectedly turned back to acceleration.”

Consumer expenditure that was adjusted for inflation grew 0.2% in July after remaining unchanged in June as monthly inflation declined, signalling a stable rate of growth at the beginning of the third quarter.

Personal income increased by 0.2%, but salaries surged by 0.8% following a 0.6% increase in June. A decline in non-wage income limited personal income.

Strong pay growth in the midst of a competitive labour market is positive for consumer spending, particularly if inflation stays low. At 5%, the saving rate remained unaltered.

Despite the modest increase in consumer expenditure, this quarter’s GDP growth is anticipated to pick up due to a declining trade deficit. In a second report released by the Commerce Department on Friday, it was revealed that while imports fell, the goods trade deficit shrank 9.7% to $89.1 billion in July. Retailer stockpiles increased 1.1% while wholesale inventories increased by 0.8%.

According to Matt Colyar, an economist with Moody’s Analytics in West Chester, Pennsylvania, “the baseline view is for the U.S. economy to stay recession-free.”

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