DAILY ECONOMIC DATA

July Personal Income and Consumption

Personal income increased 0.5% in July while personal consumption increased 0.4%. The consensus expected gain for each was 0.3%.

Disposable personal income (income after taxes) increased 0.6% in July and was up 6.0% versus a year ago.

The overall PCE deflator (consumer price inflation) rose 0.1% in July and was up 2.1% versus last year. The “core” PCE deflator, which excludes food and energy, rose 0.1% in July and was up 1.9% versus last year.

After adjusting for inflation, real consumption was up 0.3% in July. Real consumption is up 2.5% versus July 2006.

Implications: Solid data today on July personal income and spending. Income was up 0.5%, the most in four months, and was up 6.6% versus a year ago, signaling that consumers have the ability to boost spending. Real (inflation-adjusted) spending was up 0.3% in July. Data available so far suggests real consumption will grow at about a 2.5% annual rate in Q3, an acceleration from the 1.4% rate in Q2. Despite today’s seemingly benign 0.1% increases in both the overall and “core” PCE price indexes for July, our primary concern remains inflation. Although the overall PCE price index dipped down to a 2.1% increase versus a year ago, this is mostly due to high inflation readings in the middle of last year, making the year-to-year change in prices look artificially low. Even if overall PCE prices grow at only a 2% annual rate in the next four months, the year-to-year change in prices goes from 2.1% in July to 3% by November. In addition, as the chart to the right shows, overall PCE prices are up at a 2.6% annual rate the past five years, a clear upward trend. In our view, inflation is still too much of a concern for the Federal Reserve to cut the federal funds rate.