August PCE inflation stable but high, Q3 consumption constrained by delta

August PCE inflation stable but high, Q3 consumption constrained by delta

*Real consumption rose 0.4% in August (Chart 1), reversing its decline in July, while PCE inflation rose 0.4% and 0.3% excluding food and energy, lifting their yr/yr increases to 4.3% and 3.6% (Chart 2). This points to a flattening of real consumption in Q3 and consumer inflation showing signs of stabilizing at a high level.

* Real consumption of goods rose 0.6%, while consumption of services edged up 0.3% reflecting the resiliency of the services sector more broadly, despite softness in certain services industries driven by the delta variant and health concerns (Chart 3). Real consumption of durable goods declined for the fifth consecutive month, falling 1.3%, although it remains significantly higher than its pre-pandemic level.

* The PCE goods price index rose 0.6% m/m and 5.5% yr/yr, while the PCE services price index rose 0.3% m/m and 3.6% yr/yr reflecting a combination of strong demand and supply chain disruptions that have contributed to broad-based price increases.

*The PCE durable goods price index rose 0.9% m/m and 7% yr/yr, as supply bottlenecks ranging from logjams at ports to a shortage of semiconductors have constrained supply amidst strong demand (Chart 4). With core PCE inflation currently running at 3.6% yr/yr and anecdotal evidence suggesting supply chain disruptions are expected to persist well into 2022, inflation risks are weighted to the upside.

Chart 1: Real personal consumption expenditures

Chart 2: PCE inflation and core PCE inflation

Chart 3: Real consumption of goods and services

Chart 4: PCE: Durable goods, nondurable goods, services (yr/yr % change)

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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