United States: Spending and inflation outlook – Wells Fargo

Wells Fargo Economics, led by Tom Porcelli and colleagues, expects July consumer spending to rise modestly, with nominal Personal Income up 0.3% and spending up 0.2%. They highlight fading support from tax refunds, leaving demand more reliant on income growth. PCE inflation is seen easing gradually, with the deflator and core PCE both slowing but still above the Federal Reserve’s target.

Consumer data and PCE signals

"Consumer spending appears to have held up in July, and we forecast a 0.2% gain in nominal spending. While headline retail sales disappointed, the weakness was largely traced to lower gasoline prices and an unusually large drop in nonstore (online sales), likely reflecting the calendar shift of Amazon Prime Day into June this year. Excluding those distortions, control group sales excluding nonstore retailers were up 0.4%, just above its average pace over the past six months and pointing to steady underlying goods demand."

"The more important story for markets is what comes next. The boost from larger-than-usual tax refunds that helped cushion households form higher gasoline prices has now largely faded, leaving consumer spending increasingly dependent on underlying income growth. We expect nominal personal income rose 0.3% in July."

"Even so, real disposable income should continue to gradually improve, and year-over-year growth is likely to grind modestly higher in coming months if labor market conditions remain stable, allowing consumer spending to continue."

"We're not expecting much surprise on inflation. The latest CPI and PPI reports point to a 0.1% gain in the PCE deflator in July, nudging the year-over-year rate down to 3.6%. Core PCE inflation is expected to rise 0.2% on the month, leaving the annual rate at 3.3%."

"While inflation remains above the Fed's target, the recent data are consistent with a gradual easing in underlying price pressure."