US PCE inflation: economy flashing a stagflation warning, warns deVere CEO
US consumers pulled back sharply in July while inflation stayed stuck well above target, a combination the CEO of global financial advisory deVere Group says investors are not taking seriously enough.
New Commerce Department data released today shows inflation adjusted consumer spending was flat in July, a sharp slowdown from a 0.4% gain in June.
At the same time, the Personal Consumption Expenditures (PCE) price index, the gauge the Federal Reserve uses for its 2% inflation target, held its annual rate at 3.7%, above the 3.6% economists had forecast.
Core PCE, which strips out food and energy, came in at 3.3% annually.
He says: “Growth is stalling while inflation refuses to fall. Put those two trends together and you get the looming spectre of stagflation.
Nigel Green says the combination puts the Federal Reserve in a genuinely difficult position heading into its next decision.
“A central bank can fight high inflation by raising rates, or it can support weakening growth by cutting them, but not both. This data suggests the US economy may now need both at once.”
The Fed’s target range currently sits at 3.50% to 3.75%, and its next rate decision lands on 16 September. Ahead of today’s inflation data, futures markets were already leaning toward a hold rather than a cut or a hike.
Nigel Green says this report makes a hold even more likely, but for the wrong reasons.
“Markets are reading a hold as caution. I read it as a Fed that’s run out of good options.
“Cutting into inflation this sticky risks reigniting price pressures investors thought were behind them. Hiking into spending this weak risks tipping an already slowing consumer over the edge.”
He says the flat spending figure deserves more attention than it is getting.
“Consumers pulling back while prices keep climbing is the clearest signal you can get that household budgets are being squeezed from both directions.
“Wages aren’t stretching as far, and now people are buying less to compensate. This is not a resilient economy absorbing higher rates comfortably, and investors treating it as one are misreading the data in front of them.”
The deVere CEO warns against assuming the current calm in markets will hold until September. “Stagflation scares tend to arrive quietly and then move fast once bond markets start repricing growth and inflation expectations at the same time.
“The label alone should encourage investors around the world to revise how their portfolios are built heading into autumn.
“America has not seen this combination take hold since the 1970s, and it took years of policy mistakes to shake off back then.
“Investors treating today’s inflation data as a temporary blip are gambling on history not repeating itself.”