US personal income and spending growth slows more than expected in July, prices dip

According to the Department of Commerce, incomes grew at a month-on-month pace of 0.2% in July (consensus: 0.6%) and spending or personal consumption expenditures by 0.1% (consensus: 0.5%).

In parallel, the headline PCE price deflator, the Federal Reserve's preferred price gauge, slipped by 0.1% on the month (consensus: 0.1%) while at the core level it was up by 0.1% (consensus: 0.3%).

The result of the decline in prices was that in inflation-adjusted terms PCE spending rose by 0.2% on the month after remaining flat in June and a 0.1% dip in May.

Disposable personal incomes, which subtracts taxes from wages, increased by 0.3% on the month following a two tenths of a percentage point decline in June.

Year-on-year, headline PCE price growth slowed back from 6.8% for June to 6.3% and at the core level from 4.8% to 4.6%.

As a proportion of disposable income, the personal rate of saving was unchanged versus June at 5.0%.

Commenting on the latest figures, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the reported 0.2% rise in nominal incomes looked "suspiciously low", telling clients an upwards revision looked "a decent bet".

He also highlighted the 0.3% rise in real incomes, calling it the "big story" from Friday's report and pointed out how it was the biggest increase in a year thanks to falling petrol prices.

The economist also believed that the downward trend in core PCE was now well-established, but despite running at a quarterly annualised pace of 4.3% at present that alone would not dissuade the Fed of the need for a 75 basis point rate hike in September, so all eyes would now shift to the producer price and CPI reports for August due out before the next policy meeting.

"Note that real-time data show that both airline passenger numbers and activity in the restaurant sector are picking up again in the wake of the drop in gas prices," he added.

"Our base case is that Q3 consumption will rise by about 2%."