According to the PCE dataset, which will add more color to the Fed’s tapering path; In July, personal incomes increased by 1.1% (expected 0.3%) and personal expenditures increased by 0.3% (revised data in June 1.1%) MoM. PCE deflator increased by 0.4% in July, while on an annual basis it rose to 4.2% from 4% in June. The annual core PCE deflator, the Fed’s preferred indicator of inflation, remained unchanged at 3.6% as expected.
If we look at the details of the data; The increase in personal income in July mainly reflected increases in government benefits and employee salaries. Within government benefits, the increase in “other” benefits (such as the American Recovery Plan, child tax credit payments) was partially offset by a decrease in unemployment insurance, reflecting the decline in pandemic payments. Of course, the decrease in unemployment insurance payments is also a positive development in terms of job growth. The PCE deflator for July also reflects increases in both goods and services. Energy prices increased by 23.6% and food prices increased by 2.4%. Within services, increases are common in all expenditure categories, especially food services and accommodation. There are decreases in the temperature of the goods. These declines were partially offset by increases in gasoline and other energy products. Excluding food and energy, the PCE deflator in July increased by 3.6% from a year ago. This is why PCE is preferred by the Fed; It eliminates the impact of highly volatile items as well as excluding the impact of food and energy in core indicators.
The degree of readings is important in terms of; If the weak readings in the data show that the number of virus cases that hit the economy again via the Delta variant is increasing, it may dispel some tapering concerns, but the solid readings may add to the uneasiness in the market sooner than previously expected. Before Jackson Hole (although the September Fed meeting seems to be more important in this respect), we have to draw conclusions from this. After the strong July payrolls, it is necessary to pay attention to the inflation phenomenon in the increase in incomes. Because the main phenomenon that will encourage the Fed to start tapering is high inflation. The rise in private wages and salaries is a phenomenon that the Fed will solidify its foothold for tapering.
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