Fed's Favorite Inflation Measure Surges At Fastest Pace In 30 Years As Spending, Incomes Rise

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by Tyler Durden
Friday, Aug 27, 2021 - 08:50 AM

Ahead of today's personal income and spending data, trader interest was piqued by Julye's poor retail figure for July, which came in the context of that sharp drop in Michigan confidence. Will the spending data confirm the dismal retail sales data which as we previously noted, saw a plunge in personal savings as consumers tapped. As for income, Bloomberg reminds us that July is the first full month without pandemic benefits in a number of states, which in turn followed June's record rise in consumer credit. If that reflects a shortfall in income as those benefits expired, it will show up in today’s data and further underscore the Fed's cautious approach. Strong income, on the other hand, would of course offer less reason for caution. We will also get the PCE deflator, the Fed’s preferred measure of inflation. The consensus expectation is a further rise to 4.1% in year-on-year terms. In his speech, Powell will stress again that the currently high level of inflation is transitory.

So with that in mind, moments ago the BEA reported July's personal income and spending, where the first beat expectations of just 0.2% increase, rising at an impressive 1.1% rate M/M, the most since March and up from 0.2% in June, while spending on the other hand disappointed, coming in at 0.3%, below the 0.4% expectation and down from 1.1% in June.

Reassuring that the US consumer is still getting solid incomes, if maybe not enough to spark a spending frenzy, on the income side private wages were up a solid 11.4% YoY, while government workers' wages rose at a record 8.1% YoY...

And with incomes increase faster the spending in August...

... it meant that the personal savings rate rose modestly, from a post Covid low of 8.80% hit last month to 9.60% in July.

Remember when the world's prognosticators spoke euphorically of the pent-up demand coming any minute from the $2.5 trillion in excess savings - well that number is now down to just $1.7 trillion, and almost back to $1.3 trillion 'norms.

Finally, and perhaps most importantly, the Fed's favorite inflation indicator - PCE Core Deflator - rose to +3.6% YoY (matching the upward revised 3.6% in June) and the highest since July 1991, while the headline PCE Deflator also hit a new 30 year high of 4.2%, slightly above the 4.1% expectation and also the highest since 1991.

In other words, some strong and some weak data, so for anyone looking for clear clues as to what the Fed will do today, none of the above will be of help.