Americans rein in spending in May, PCE inflation in line

Americans reined in their spending in May even as incomes grew more quickly than expected.

According to the U.S. Department of Commerce, in seasonally adjusted terms, in June personal consumption expentures rose by 0.1% month-on-month (consensus: 0.2%) and incomes by 0.4% (consensus: 0.3%).

On the prices front meanwhile, the headline PCE price deflator was up by 0.1% and by 0.3% the core level (consensus: 0.3%).

Worth noting, the core PCE was the Federal Reserve's preferred measure for inflation.

The rate of increase in headline PCE was up by 3.8% year-on-year and by 4.6% at the core level.

In May, headline PCE rose by 4.3% and the core deflator by 4.7%.

Commerce revised its previous estimate for month-on-month personal spending growth in April by two tenths of a percentage point to 0.6%.

The personal saving rate rebounded from May's print of 4.3% to 4.6% in June.

Commenting on the latest numbers, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the inflation numbers "were much better than of late", highlighting that the core PCE rose 0.32% - the smallest increase in six months.

Core PCE services prices excluding rents were up by 0.23%, although at 4.4% year-on-year they remained "too high", albeit with a good chance of more progress in the next few months.

He added there was a "decent chance" of a decline in headline PCE price growth to 3.0% by June, 2.5% by December and with a further slowdown in the front half of 2024.

Core PCE would remain around one percentage point higher in Decmeber and into 2024.

"These data are not enough to stop the Fed hiking in July if the June CPI and payroll numbers are strong," he judged.

"Our base case, though, is that these data will be on the softer side, so we think the chance of a further hike is about 40%. And if they don’t hike in July, they’re probably done."

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