This morning, we got the June Personal Consumption Expenditures (PCE) report. This is the preferred inflation gauge of the Federal Reserve. The PCE was up 0.1% vs last month and 2.5% vs last year. The monthly number accelerated by 0.1% and the yearly declined by 0.1%; both very small changes in trend. The 2.5% annual PCE was slightly above expectations of 2.4%.

 

The Core PCE, which excludes food and energy, was up 0.2% vs last month and 2.6% vs last year. The monthly was up by 0.1% and the annual was consistent with the prior month. These were slightly above expectations of 0.15% monthly and 2.5% annually.

This report shows a continuation of prior trends with continued inflation and rising income. Personal income was up 0.2% in the month which was just behind the 0.3% growth in expenses. Worth noting, the May PCE monthly increase was adjusted from the previously reported 0.2% to a higher 0.4%. In general, prices are still increasing faster than wages, but that difference is slowing.

 

Continuing a trend we’ve seen in other reporting, prices for goods declined by 0.2% while services prices were up by 0.2% (3.9% vs last year). That sticky services number has been an issue for the Fed for the past two years. The report also says food prices are up 1.4% vs last year. I still don’t believe that’s accurate and have yet to find someone who actually goes to the grocery store who tells me their bills are up only 1%.

 

It’s worth pointing out that the government is still engaging in massive fiscal stimulus. For the people still insisting Americans should be more grateful for disinflation (a reduction in the rate of inflation), the following chart explains the reason so many are still irritated and worried about price increases.

As of right now, the market is still highly confident of a September rate cut assigning an almost 100% probability of that. I’m less optimistic of that outcome. No matter which index we use, or how we measure it, inflation remains above 2% and we just saw a GDP print of 2.8% yesterday. Smart people, like DKI Board member and economist, Michael (Mish) Shedlock are pointing to weakness in the private market economy. I agree with Mish on this. The reason I think the probability of a September rate cut is below 100% is due to:

• Continued inflation above 2%.
• Aggregate GDP numbers that are still strong due to massive government stimulus spending that is causing inflation. No one in Congress of either party is about to cut spending.
• When the market is assigning a 100% probability of something, it’s easy to take the under.
• Many market participants have been predicting Fed rate cuts since May/June of 2022. They’ve been consistently wrong. They won’t always be wrong, but market predictions on this particular point have not been predictive in years.

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

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