Inflation as expected going into jobs week

This week ended relatively flat in interest rate markets.  This is good news as rates have been sitting at a low point that will start to allow people to refinance and to better qualify for homes.  This is the start of the decline in rates so more good things are to come.  The big news of the week was Friday’s Personal Consumption Expenditures (PCE) report, the Federal Reserve (Fed’s) favorite measure for tracking inflation.  Next week is shortened by the Labor Day holiday on Monday but will be jam packed with important news, especially the Bureau of Labor Statistics (BLS) Jobs Report.

July headline month-over-month (MOM) PCE came in at expectations at .2%.  It was actually .155% but they round to .2%.  The more important Core PCE which strips out energy and food costs that are highly volatile, came in as expected at .161% which also rounded to .2%.  If this level of inflation continued, we would see 12 X .161% = 1.932%.  Remember, the Fed wants Core inflation to be at or under 2%.  It looks like that is where we are!  Annual Core inflation was 2.6% and is still over the 2% mark due to higher readings in the past 12 months.  If you look at the average for just the past 3 months and annualize it, the Core inflation would be 1.7%.  

Also in the PCE report is important information about consumer income, spending, and savings changes.  As expected, incomes rose by .3%, spending rose .5%, and savings rates dropped to 2.9%.  It isn’t a sign of a strong economy that spending is outpacing income growth.  It is a sign that consumers are depleting their savings which will slow down the economy.  Prior to Covid, the savings rate was around 8%.  January of 2024 saw it at 4% and now we are at 2.9%.  All signs of a slowing economy, which is good for interest rates.

Next week is full of important reports:

Tuesday: ISM Manufacturing

Wednesday: Job openings and labor turnovers (JOLTS)

Thursday: ADP Employment Report and Initial Jobless Claims

Friday: BLS Jobs report

Since the Fed seems more satisfied with the progress of inflation than employment, the Jobs report will be the last major report prior to the Fed’s September meeting on the 17^th and 18^th.  It will give us a good clue as to how much the Fed is likely to cut and the frequency of subsequent cuts.