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First Cut: PCE deflator puts inflation about unchanged, still below Fed’s 2% objective

The report on personal income and spending for May presented a picture of inflation that was essentially unchanged in the past three months. The PCE deflator was up 1.5% compared to May 2018, a minimal down tick from 1.6% in April. The core PCE deflator was up 1.6% in May from a year-ago, the same as in April.

Upward pressure on prices in the Fed’s preferred measure of inflation remains below target, but not out of reach. Justifications for a rate cut based on the need to defend the credibility of the inflation objective are ignoring that other measures of inflation are running more-or-less on target and that there are some short-term factors that could be depressing the PCE deflator. Given the robust labor market, the FOMC has room and time to stick to its balanced approach to setting monetary policy.  There may be other reasons to impose a so-called “insurance” rate cut, but these are due more to exogenous events.

Personal income was up a solid 0.5% in May month-over-month following the same increase in April. Increases in wages and salaries were softer in May at up 0.2%. Some of the heat has gone out of the labor market, so wages and salaries may be rising more slowly. However, there is still plenty of demand for workers, so increase will not be absent.

Personal consumption expenditures were up 0.4% in May from April, a moderation after the more robust gains int he prior two months. However, spending on durables had a nice rebound of 1.7%, the 0.1% dip in nondurables was due to falling gasoline prices and not necessarily demand, and services were on track with a 0.4% rise.

Overall, the report was slightly above expectations and should reassure that the consumer is not absent from participating in the economy.

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