Persistent Inflation and US Consumer Spending: A Closer Look at the PCE Index

Tariff-induced inflation is gradually permeating the US economy, coinciding with a slowdown in economic growth. Investors and economists are closely watching the release of the Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge. The index is projected to rise 0.3% month-over-month in July, matching the previous month. If realized, the PCE inflation rate will increase from 2.8% to 2.9% year-over-year, the highest level since February of this year, and potentially reach 3%, the highest since March 2024.

Bill Adams, chief economist at Comerica Bank, notes that inflation has been picking up since the spring as tariff costs have gradually moved from ports to warehouses to cash registers. He adds that the July Producer Price Index (PPI) data, released earlier this month, showed an increase in service sector inflation, which is unexpected since the service sector is not affected by tariffs, which are only levied on imported goods.

Inflation Components: A Deeper Dive

Adams emphasizes the importance of monitoring core service data excluding energy and housing, which showed an increase in the PPI report. He believes that this may indicate that inflation in 2025 may not be driven solely by tariffs. However, the impact of the high inflation report may be limited, as Federal Reserve Chairman Jerome Powell indicated last week that his concerns about inflation have diminished significantly and that he is focusing more on the labor market, which may suggest a justification for cutting interest rates in September.

The forecast for July consumer spending data indicates a growth of 0.5%, higher than the 0.3% increase recorded in the previous month. However, analysts believe that this growth is due to the large increase in new car sales, and that consumer spending growth will moderate later.

Future Outlook for Consumer Spending

Economists agree that consumers are still spending, but are becoming more selective. They expect a slowdown in consumer spending growth in the third and fourth quarters of the year due to rising prices and a slowdown in the labor market. However, the continuation of the trade truce between the United States and China could mitigate this slowdown. Analyzing consumer behavior provides valuable insight, and closely monitoring the economic indicators will be crucial for navigating the evolving economic landscape.