Key Highlights

  • The PCE price index rose 3.7% year-over-year in July, above consensus expectations of 3.6%, while core PCE inflation, excluding food and energy, held steady at 3.3%, matching expectations.
  • Personal income rose $115.1 billion, or 0.4%, in July, exceeding expectations of a 0.2% increase and marking the ninth consecutive monthly gain.
  • Real personal consumption expenditures were essentially flat in July, rising less than 0.1%, as a $49.9 billion decline in goods spending largely offset an $86.2 billion increase in services spending.
  • The personal saving rate rose to 3.0% in July, with personal saving totaling $712.0 billion for the month.

Inflation Runs Hotter Than Forecast

The personal consumption expenditures price index, the Federal Reserve's preferred Inflation gauge, rose 0.2% in July from the prior month, matching expectations, and increased 3.7% from the same month a year earlier, topping consensus forecasts of 3.6%. Core PCE inflation, which excludes food and energy, also rose 0.2% for the month and held at 3.3% annually, in line with expectations. Services inflation accelerated to 0.3% monthly from 0.1% in June, while goods prices fell 0.1%, a smaller decline than June's 0.6% drop.

Consumer Spending Stalls as Goods Purchases Retreat

Personal consumption expenditures increased $36.3 billion, or 0.2%, in July, slowing from a 0.3% gain in June but exceeding expectations for a 0.1% increase. The dollar increase reflected an $86.2 billion rise in services spending that was largely offset by a $49.9 billion decline in goods spending. In real, inflation-adjusted terms, PCE was essentially flat, rising less than 0.1% for the month, following a 0.4% increase in June.

The pullback in goods spending was broad-based, led by a $14 billion decline in spending on gasoline and other energy goods, a $13.6 billion drop in recreational goods and vehicles, and a $9.4 billion decrease in motor vehicles and parts. On an inflation-adjusted basis, goods spending fell 0.6% for the month, reversing a 0.6% increase in June. Within services, growth moderated across most categories even as overall services spending remained positive, with real services spending up 0.3% for the month, driven by gains in financial services and insurance, health care, and housing and utilities, though growth slowed from June's pace in healthcare, transportation, recreation, and financial services.

Personal Income Extends Its Streak of Monthly Gains

Personal income rose $115.1 billion, or 0.4%, in July, well above expectations of a 0.2% increase and marking the ninth consecutive monthly rise. Disposable personal income, Personal Income after taxes, increased $125.9 billion, or 0.5%. The increase in income primarily reflected gains in compensation, led by private wages and salaries, along with higher government social benefits, driven mainly by Medicaid and Medicare, and higher personal income receipts on assets, led by Dividend income.

Personal saving totaled $712.0 billion in July, with the personal saving rate, saving as a share of disposable income, rising to 3.0%.

Conclusion

July's data presents a mixed picture for the Fed: inflation running slightly hotter than expected even as real consumer spending flatlined, a combination that complicates the case for near-term rate cuts without necessarily strengthening the argument for hikes. The continued streak of rising personal income, even as spending growth stalls, suggests households may be building savings rather than pulling back out of necessity, a distinction that will likely shape how policymakers interpret the data ahead of the Fed's Jackson Hole gathering later this week.