US Inflation Stalls as Consumer Spending Remains Soft

The US inflation rate continues to inch closer to the Federal Reserve's target of 2%, but at a glacial pace. The core PCE deflator, the Fed's preferred measure of inflation, rose 0.2% month-over-month and 3.3% year-over-year in July, meeting expectations. However, consumer spending remains stagnant, with real personal spending flatlining at 0.0% month-over-month.

The slowdown in consumer spending is a concern for the Fed, which has been closely watching the trend. Despite some upward pressure on inflation, the overall picture remains soft, with wage growth sluggish and household disposable income barely growing. This has led to a widening savings ratio, rising from 2.6% to 3%, indicating that consumers are relying on savings rather than spending.

The disparity in consumer spending is evident in the 'K-shaped' narrative, where middle- and lower-income households struggle with financial pressure due to stagnant incomes and high debt levels. In contrast, higher-income households continue to spend freely, buoyed by rising household wealth and a relatively low savings rate.