To get a feel for where inflation may be headed, let’s look at the latest economic data, beginning with jobs numbers. At the end of last week, Non-Farm Payrolls came in at 187,000. While this reading is higher than in the prior month, it is below the 12-month average of 264,500. There were also downward revisions to prior months, which in total lowered the payroll gains to 77,000. The dissolution of Yellow Trucking added to the losses in transportation, but is unlikely to be repeated. Also, the writers’ strike should not be considered a long-term loss of jobs.
The unemployment rate climbed to 3.8% which is a result of an increase in the number of those looking for work (an expansion of the workforce).
While total payrolls increased, average earnings increased slightly at 0.24% month-over-month and 4.29% year-over-year, while the average hours worked rose to 34.4 hours per week—which is very close to the 12-month average.
Personal income and spending mixed
Turning to personal income and spending, we saw a month-over-month increase in personal income of 0.2%, but when that number is adjusted for inflation, we have a month-over-month decline of 0.18%. Moreover, the year-over-year growth in real personal income declined from 4% to 3.8%.
Total spending also increased for the month, but given that real disposable income declined, households both dipped into savings and also increased spending just to keep pace with inflation.
Another key metric ticking upward
We also received new data on the PCE Index (Personal Consumption Expenditures index) which is the Fed’s preferred measure of inflation. The core number increased to 4.24% year over year from the prior month’s reading of 4.1%. Given that the Fed wants inflation to be down around 2%, this is a move in the wrong direction.
Even the headline PCE increased to 3.28%.
When we look at the subsections of the PCE, we see that services (a major piece of our economy) continues to rise unabated, while non-durable goods continues to be a positive contributor to inflation.
Slow but steady contraction
The final piece of economic data released was the ISM Manufacturing Index which climbed from 46 to 47.6. However, any reading below 50 is a contraction, so manufacturing contracted at a slower pace in August. The 47.6 reading also means that manufacturing has been contracting for 9 straight months.
What to make of all the economic data?
The general weakness in the jobs numbers certainly gives the Fed a reason to remain steady at their next meeting. They have said in numerous releases that they consider weakness in jobs to be a key element in their fight against inflation. However, with real personal income growth slowing and inflation remaining stubbornly above 4%, the battle against inflation is clearly not over. While the Fed might hold rates steady at their September meeting, it seems very clear that they will need to hold rates at an elevated level for some time and that rate cuts are unlikely.
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