MACRO: FED key inflation indicator surges at fastest pace in 30 years

Core PCE prices in the US, which exclude food and energy, dropped to 0.4% on a monthly basis in June, from a 0.5% rise in previous month and below market expectations of 0.6%. The annual rate however, which is used by FED as an main inflation indicator, rose to 3.5% in June from 3.4% in May. Today's reading came in below analysts’ estimates of 3.7% however, this is a level not seen in 30 years. Fed officials have been reiterating that such price pressures are transitory because of fiscal stimulus, supply constraints, and rising commodity prices. There is also a low base effect from last year weighing as the coronavirus pandemic dented economic activity and lowered prices. 

PCE Core Deflator  jumped to +3.5% YoY (vs 3.4% in May), the highest since July 1991. Source: Bloomberg via ZeroHedge

Personal income and spending numbers, however, were better than expectations and contributed to higher inflation readings. Personal consumption jumped 1% MoM in June, rebounding from a 0.1% drop in May and above analysts' estimates of a 0.7% increase, as consumers shifted spending to service-sector industries, such as restaurants and travel. The rise in spending on pharmaceuticals, gasoline, food services, accommodations, and other energy goods more than offset a decline in purchases of motor vehicles and parts.

Meanwhile, personal income rose 0.1% in June, from a revised 2.2 % decline in the previous month and beating market expectations of a 0.3 % fall. The increase in personal income in June primarily reflected an increase in compensation of employees driven by private wages and salaries, while government social benefits decreased. 

Consumer spending rose more than expected in June, but part of the increase reflected higher prices, with annual inflation accelerating further above the Federal Reserve's 2% target. Source: Bloomberg via ZeroHedge

Recent weaker-than-expected readings on the U.S. economy eased some concerns about the Federal Reserve dialing back asset purchases. It should be remembered, however, that although today's reading was below expectations, the growth rate is still very high and so far there are no clear signals that would herald a reversal of this trend.