July's Personal Consumption Expenditures (PCE) data — the Federal Reserve's preferred inflation gauge — came in line with expectations on Friday. Core PCE, which excludes volatile food and energy costs, increased by 2.6% year-over-year, while the headline PCE index rose 2.5%.
Interactive Brokers senior economist José Torres joins Morning Brief to discuss what this data indicates about the overall economy.
Torres notes that despite cooling inflation, the economy is not amazing as consumers are "managing their budgets like light switches." He highlights alternating periods of strong spending and pullbacks focused on saving. Additionally, while inflation is cooling in sectors like commodities and automobiles, services continue to show inflationary pressure.
Regarding the PCE data's impact on future interest rate decisions, Torres believes the Fed will implement one rate cut, but it will affect pricing power across industries. He cautions that as rates lower, there are "risks that the economy starts to reheat."
All right, for more on July's inflation print, we have Jose Torres, Senior Economist at Interactive Brokers joining us now. Jose, good to see you here. I think throughout Yahoo Finance's programming, at least from 9:00 to 11:00 today, you'll hear a lot of economists say this is a Goldilocks economy. I'm not a fan of that term. Is it just an amazing economy because it's slowing but not too fast and we're going to get more rate cuts and growth might pick up in the back half of the year?
Well, Brian, great to see you. I don't think it's an amazing economy, and the reason it's not phenomenal is because consumers and households alike are managing their budgets like light switches. Some months we're seeing significant consumer spending, while others, they're really hunkering down, looking to alleviate the budget from past spending and also looking to save a little bit and provide more space for further months. We saw that in June. June spending was weak, and July has been a huge expansion. As far as inflation, inflation has been a terrific story, Brian, and really, it's been all about goods and commodities cooling off. When you look at automobiles, they've declined in price every month this year. When you look at commodities, despite geopolitics starting to, geopolitical tensions beginning to mount, commodity prices are really well anchored, and those two dynamics have really brought price pressures lower. As far as services, it's been a little mixed, driven by the consumer spending ebbing and flowing sharply, but then also housing. You know, housing prices are at all-time highs, rents are still high, and those are still headwinds for inflation.
Jose, it's great to see you. As we were taking a look on the screen at the Fed's preferred inflation gauge, PCE, this morning, and really trying to get a sense of what this does, if anything, for what we've already heard from the Fed going into that September meeting that's going to take place in just about three weeks, the 17th and 18th here. We're watching the CME FedWatch probability here, and it's just eased further towards this probability of a 25 basis point cut. So, does this preferred inflation gauge do anything for September? For those who are looking for a 50 basis point cut and just kind of cooling those expectations, and then what does this signal for the rest of the year?
Well, I think as the Fed walks down the monetary policy stairs, it's going to be a slow walk, similar to what we're seeing in the ECB. They cut once and now they don't know if they're going to reduce rates further. A serious consideration, alluding to what I spoke about earlier with the used cars, when rates start to come down, what's going to happen to pricing power at automobile dealerships? What's going to happen in the real estate sector? You know, you have a lot of folks that want to get in, they want to buy homes. You have an underbuilt condition, substantial migration flows. So, as you begin to reduce rates, you have risks that the economy starts to overheat. Today's report also strongly supported 25 because look at the spending numbers, Brad. The spending numbers were terrific. Folks are out there. They're spending on services.
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"I think as the Fed walks down the monetary policy stairs, it's going to be a slow walk, similar to what we're seeing in the ECB [European Central Bank]," Torres tells Yahoo Finance.
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This post was written by Angel Smith