Personal income was essentially flat in June, as decreases in personal dividend and interest income partially offset a 0.4% monthly gain in wages and salaries. Removing taxes and price changes, real disposable personal income fell 0.1% on the month.
There were fewer surprises on the spending side, with personal spending rising 0.1%. In real terms, personal spending was flat, after a sizeable 0.7% monthly gain in May.
Consumer prices were essentially flat in June, bringing the year-on-year inflation rate to just 1.4% (from 1.5% in May). Core prices (excluding food & energy) rose 0.1% month-on-month – leaving year-on-year core PCE inflation at 1.5%, unchanged from May.
No growth in income combined with spending gains, led the savings rate to tick down to 3.8% from 3.9% in May. If that sounds lower than you may remember it, it is. Today’s data reflects annual updates to the national accounts, which resulted in the savings rate in Q1 being revised down from 5.2% to 3.9%. That reflected downward revisions to personal income in the recent history, while personal spending was revised up. On net, it means that the savings rate declined more rapidly through 2016 than previously reported, as consumers increasingly spent their windfall gains from lower energy prices. And, that the recent trend level of the savings rate is now at levels not seen since prior to the recession.
Key Implications
The softness in June consumer spending was not unexpected, with Q2 data already released with last week’s GDP report. June’s softness does provide a bit of a weak start to consumer spending in the third quarter. However, the lack of income growth would be more concerning were it not for the fact that growth in wages and salaries remained healthy.
With the recent softness in inflation front and center, more important are the nuances of June prices and what they say about inflation trends. The core PCE deflator – the Fed’s preferred inflation gauge – did gain a bit of momentum in June as expected.
The Federal Reserve has signaled that it is monitoring inflation developments closely. As discussed in our latest Dollars and Sense, the relationship between growth and inflation has become more muted in recent years. Inflation is taking longer to respond to an acceleration in growth this time around. For now, we and the Fed maintain faith in our models that tell us inflation should pick up in the months ahead, and that the Fed can take interest rates higher. But, the pace of hikes the Fed currently has penciled in in its outlook are likely too aggressive given the soft starting point for inflation.
