Written by Shane Balkham

In July, the Fed’s preferred measure of inflation, known as the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy items, rose by 0.2% month-over-month. This mild increase has reinforced the Federal Reserve’s plan to start cutting interest rates at the next meeting in September.

Furthermore, consumer spending, which makes up more than two-thirds of US economic activity, saw a notable increase of 0.5% in July. While this may suggest that the economy remains strong and might temper expectations for a significant Fed rate cut, income growth was modest at 0.3%, and the savings rate declined to 2.9% from 3.1% in June. Some arguments suggest consumers are likely tapping into their savings to maintain spending, therefore, future spending may not be sustainable and may reflect ongoing financial stress in a high interest rate environment. However, others argue that the income figures might be understated, as they may not fully account for earnings by individuals working without legal documentation.

Nonetheless, the labour market is another key factor in the Fed’s decision-making process. With some signs of weakness emerging, Fed officials are paying close attention to how employment trends could impact consumer spending, which is the main driver of the economy. The August jobs report, due this week, will be crucial in shaping their decisions at the upcoming September meeting.

Across the Atlantic, the Eurozone is also seeing a slowdown in inflation. In August, year-over-year prices increased by 2.2%, down from 2.6% in July. This marks the lowest inflation rate in three years, and investors are already anticipating that the European Central Bank (ECB) will further reduce interest rates before the year ends. However, some policymakers remain cautious, noting that the battle against inflation isn’t over, particularly in the services sector where prices continue to rise, increasing 4.2% in August from 4.0% in July. Nevertheless, this news has been supportive for European equities, with the MSCI Europe ex-UK returning +0.8% over the last week and extending gains to +1.8% for the month, both in GBP terms.

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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 2nd September 2024.

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