Inflation Improved, Though Gas Prices Rose

Inflation improved further in August—at least for people who don’t have to fill a gas tank. The personal consumption expenditures price index rose 0.4% on higher gasoline prices, and edged up to a 3.5% year-over-year increase from 3.4% in July. But the core PCE price index excluding food and energy rose a cool 0.1% on the month on a 0.3% drop in durable goods prices, and had its smallest monthly increase since late 2020.

Its year-over-year increase slowed to 3.9% from 4.3%, and was the lowest since the first half of 2021. Personal income rose 0.4% on the month, as did personal consumption expenditures. Personal income and expenditures in July were revised modestly higher, too. Real disposable personal income fell 0.2% on the month, the third consecutive month without an increase.

The personal saving rate edged down to 3.9% from 4.1% in July, but that was revised up from 3.5% in the prior release; the revisions make the recent picture for consumer finances look a bit better.

Real GDP grew an unrevised 2.1% annualized in the second quarter, but the Bureau of Economic Analysis substantially revised down consumer spending growth to 0.8% annualized from 1.7% annualized in the prior release. Business investment contributed roughly half of the economy’s growth in the quarter.

Higher spending by state and local governments also added to growth. Exports of goods fell an annualized 16.0% reflecting a slump in shipments of petroleum and refined products. 

Durable goods orders rose by 0.2% in August, following a 5.6% plunge in the prior month, and were well above consensus forecasts for a 0.5% decline. New orders for defense aircraft and parts, up 19.2%, contributed the most to the increase. New orders excluding defense fell 0.7%.

Orders for non-defense capital goods excluding aircraft, a closely-watched proxy for business investment in machinery and equipment, rose by 0.9%, more than recovering from the 0.4% decline in the prior month. Business investment in equipment could yet again contribute to economic growth in Q3. 

Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.