Introduction
Government data released on Friday shows that inflation eased in June and consumer spending continued to increase for the sixth consecutive month. These trends suggest that the economy is maintaining momentum as the Federal Reserve resumes its campaign of interest rate rises.
Inflation Rates
According to the Commerce Department, the Fed’s preferred gauge of consumer prices, the personal-consumption expenditures price index, rose 3% from a year earlier in June. This is a decrease from the 3.8% increase seen in May. Core prices, which exclude volatile food and energy categories, also experienced a slowdown, rising 4.1% in June compared to a 4.6% gain in May. Economists consider core inflation to be a better predictor of future inflation than overall inflation.
Consumer Spending
Consumer spending, known as the primary driver of economic growth, saw a 0.5% increase in June compared to the previous month. This growth follows an upwardly revised 0.2% increase in May. American consumers spent more on services such as housing and recreation, as well as motor vehicles. When adjusted for inflation, spending was still up by 0.4% in June.
Economic Growth
The Commerce Department’s report on Friday came one day after announcing that gross domestic product (GDP) grew at a seasonally adjusted annual rate of 2.4% in the second quarter. This is an improvement from the 2% growth seen in the first three months of the year.
Impact of Labor Market
Agron Nicaj, U.S. economist at MUFG, believes that the ongoing strength of consumers is underpinned by a strong labor market. He stated that until there are significant changes in the labor market, consumers are likely to continue spending. From a broader perspective, Nicaj does not believe that interest rates are currently high enough to slow down the economy.
Federal Reserve Outlook
The positive economic growth may lead to further interest rate increases by the Federal Reserve to control inflation. The inflation rate remains well above the Fed’s target of 2% year-over-year.
On Wednesday, the Fed resumed lifting interest rates with a quarter-percentage-point increase. Chair Jerome Powell stated that it is too soon to tell whether this rate hike will conclude a series of increases aimed at cooling the economy and reducing inflation.