Thread by @DianeSwonk

The personal income and expenditures report was gut wrenching.

Income tumbled along with spending as the surge in retirees rushing to to get to tap Social Security payments last month reversed. That pushed overall incomes down 0.7% and more than reversed the gains of April.

The level of personal income after adjusting for inflation dropped to its lowest level since December, before the start of the year.

The loss in incomes absent the distortions created by social security payments set overall incomes back to March levels. That is still weak.

Spending contracted a less dramatic 0.3% as we suffered a payback in vehicle sales, following a front- running of tariffs by consumers in late March and early April.

However, losses were broad based and worrisome given downward revisions to consumer spending in 2Q.

Consumer spending advanced at a barely perceptible 0.5% pace in the first quarter, less than half initial estimates & a small fraction of the 4% annualized increase in 4Q.

Overall inflation edged up 0.1%, which lifted the overall figure to 2.3% from a year ago.

Core PCE, which strips out food and energy, rose a larger than expected 0.2% and jumped 2.7% from a year ago. That is the highest level since March and well above the Fed’s 2% target.

Gains were broad based with the exception of vehicle prices. Service sector inflation ⬆️

Inflation in the care economy, restaurants, foreign airfare & nonprofits drove the gains in services, which were above the level expected via the CPI & PPI data earlier in the month.

The surge in costs for community, emergency relief, inc food banks is another worrisome sign.

Bottom line

The data on inflation adds to the Fed’s concerns about inflation. Fed surveys showed that even services immune from tariff were susceptible contagion effects. The Fed is uncomfortably on the sidelines until it knows the full effects of tariffs on inflation.

Hence the majority of participants at the Fed’s June meeting penciled in two or less cuts this year. Seven of 19 had no cuts this year, up from four with no cuts in March.