We’re now 5 for 5 as non voting member and Philly Fed president Patrick Harker is a supporter of tapping the brakes on QE and also wants to finish quickly according to an interview with Steve Leisman on CNBC. Harker acknowledged the risks of Delta but also said there are signs that inflation is not so transitory.
July headline PCE rose .4% m/o/m and .3% at the core, as expected. Remember, this measure of inflation has a lower weighting in housing relative to CPI (actually half as much), and about twice the weighting of healthcare measured by Medicare and Medicaid reimbursement rates. Versus last year, headline PCE is up 4.2% and by 3.6% ex food and energy. Goods prices are 5.4% higher y/o/y while service inflation is up by 3.5%. Headline PCE is now up 5.3% from July 2019, so about a 2.6% annualized rate. With seeing the CPI a few weeks ago, it took some of the drama out of this print but sharp rental increases that are currently occurring are ahead in showing up in this data. This is not so temporary.
Wage gains are now showing up. Private sector wages/salaries rose 1% m/o/m in July after a .9% increase in June, .8% in May, .9% in April and .8% in March. That is a 13% annualized pace. Spending was up by .3% after a 1.1% increase in June. After checks went out in March and spending spiked that month by 5.2%, they’ve averaged a 6 tenths monthly increase since due to the pull forward. Combining the two puts the savings rate at 9.6% vs 8.8% in June and 9.8% in May. The thing to watch beginning in August is to what extent the end of enhanced unemployment benefits will be offset by new hiring and incomes.
Bottom line, the inflation stats alone should have the Fed begin cutting back on bond buying and now we have wage gains of note which then furthers the inflation pressures.
CORE PCE y/o/y
SAVINGS RATE