In the US, the Personal Consumption Expenditures (PCE) index in June showed a limited decline; however, inflation remained above the Federal Reserve's 2% target. A strong rebound in consumer spending in the second quarter indicates that the US economy remains resilient despite high interest rates and rising energy prices.
According to data released by the US Department of Commerce, consumer spending, one of the most important engines of economic growth, increased by 3.2 percent on an annualized basis in the second quarter of the year. In the first quarter, spending growth was only 0.5 percent.
The core PCE inflation rate fell from 3.4 percent in June to 3.3 percent. Although this decline is seen as a positive signal for Fed officials, the fact that price growth still significantly exceeds the central bank's target continues to create uncertainty regarding monetary policy.
Federal Reserve Chairman Kevin Warsh stated at a press conference yesterday that monetary policy decisions would be based not only on PCE data but on a broader set of inflation indicators. Warsh also added that the US economy remains resilient.
Economists argue that a renewed sharp increase in energy prices is one of the most significant risks to the US economy in the second half of the year. A resumption of oil price increases and heightened inflationary pressure could push the Fed to further tighten monetary policy.
High inflation is also making consumers more price-sensitive on goods. Procter & Gamble's Chief Financial Officer Andre Schulten stated that consumers are acting cautiously but spending remains stable, adding that each consumer seeks value for money.
Citigroup economists Andrew Hollenhorst and Veronica Clark stated that Warsh's increased focus on inflation indicators beyond the PCE could reduce the likelihood of an interest rate hike in the near term.
The economists noted that the core Consumer Price Index is at 2.6 percent, which is closer to the Fed's 2 percent target than the core PCE. Hollenhorst and Clark said that the broader indicators Warsh is monitoring may show more clearly in the coming months that there is no alarming acceleration in inflation.
Currently, markets are pricing in a 59% probability of a Fed rate hike in September. However, Citigroup economists believe this expectation may be overstated and that another rate increase in the near future may not occur.
*This is not an investment recommendation.
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