The Federal Reserve's primary inflation rate showed that core price pressures cooled further in July. But Fed chair Jerome Powell is now emphasizing price changes for services excluding housing and energy, which surged last month. The S&P 500, which has rallied strongly this week, climbed higher in early Thursday stock market action as Wall Street seemed to downplay the significance of the hot supercore service inflation data.
Other fresh data showed that personal spending sizzled in July, while initial jobless claims came in below forecasts.
Core Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.2% in July. Still, the annual inflation rate rose to 3.3% from 3% in June, which was the lowest since March 2021. The increase in inflation largely reflected an especially low reading in July 2022 falling out of the 12-month calculation.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core prices rose 0.2% in July, while the core 12-month inflation rate came in at 4.2%, as expected. Core inflation ticked up from 4.1% in June, which was the lowest since September 2021. However, the three-month trend for core inflation eased to 2.9% from 3.3% in June.
Wall Street economists expected a 0.2% monthly increase for both the overall PCE price index and core prices.
Fed Focus: Supercore Services Inflation
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That's in keeping with the Fed's view that the tight labor market and elevated wage growth have been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
Probably because this is a new focus for the Fed, the Commerce Department's Bureau of economic analysis doesn't break out core nonhousing services inflation, so it requires extra calculations.
July PCE data for for these services, such as health care, haircuts and hospitality, showed prices jumping nearly 0.5%. for a second straight month. Over the past three months, supercore services inflation has run at a 3.85% annualized pace, up from 3.2% in June. The annual inflation rate picked up to 4.7% from 4.1%.
The volatility of inflation readings for this segment isn't that surprising, because it covers a smaller swath of economic activity. Core nonhousing PCE services makes up slightly over half of total personal consumption expenditures. Big gains in July came in transportation services including airfares (up 1% from June); recreation services (0.8%) and financial services (2.5%). Those gains could ease, if not reverse, in months to come.
Pantheon Macroeconomics chief economist Ian Shepherdson wrote that portfolio management prices, which jumped 7.3% from June, loosely track changes in stock prices. "We expect reversion" to a flat trend in the months ahead.
Personal Income And Spending
Personal income rose 0.2% on the month vs. forecasts of 0.3%. Personal consumption expenditures rose 0.8%, above 0.6% expectations. Adjusted for inflation, consumer spending rose 0.6%.
Economists expected strong spending data after retail sales excluding autos jumped 1%, fueled by a strong Amazon Prime Day and hearty growth in spending at food and drinking places.
Jobless Claims, Layoffs
New claims for jobless benefits fell 4,000 to 228,000 in the week through Aug. 26. The four-week average of claims rose 250 to 237,500. The number of people continuing to claim jobless benefits for an inability to find work rose 28,000 to 1.725 million.
Also on Thursday, the Challenger Report from outplacement firm Challenger, Gray & Christmas said announced layoffs surged in August as U.S. employers announced 75,151 planned job cuts. That's more than triple the 23,697 announced in July.
Federal Reserve Rate Hike Odds
Ahead of the PCE inflation report, markets were pricing in just 12% odds of a quarter-point rate hike at the Sept. 19-20 Federal Reserve meeting and 50% odds of a hike by the following meeting on Nov. 1. Before a surprisingly big drop in job openings reported on Tuesday, odds for a Nov. 1 hike had topped 60%.
Markets took their cue from the tamer core and overall PCE inflation readings, as odds of a Nov. 1 hike dipped to 49%.
In his Jackson Hole, Wyo., speech last week, Fed chair Powell noted that inflation has only come down modestly for core nonhousing services. He attributed sticky inflation at least partly to the labor-intensive nature of service-sector businesses.
"Given the size of this sector, some further progress here will be essential to restoring price stability," Powell said.
Still, the Fed won't be quick to pull the trigger on additional rate hikes when core inflation is trending lower and the labor market seems to be cooling.
S&P 500
The S&P 500 edged up 0.2% after the PCE inflation report. Through Wednesday, the S&P 500 had climbed 2.5% for the week, powering above its 50-day moving average.
The S&P 500 has rallied as the 10-year Treasury yield continued to recede from its recent 15-year high. Through Wednesday, the 10-year yield had fallen 12 basis points to 4.12%.
On Thursday, the 10-year Treasury yield eased slightly to 4.11% after the data dump.
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