Jonathan Levin: The Goldilocks U.S. inflation and spending data are an illusion

Thursday’s U.S. data dump cheered financial markets up: Inflation fell from a month earlier and the “core” measure – which strips out food and energy – was softer than expected. Consumption data separately showed an economy firing on all cylinders: booming AI investment alongside free-spending consumers. Don’t expect these too-good-to-be-true Goldilocks optics to last very long.

Let’s take these one at a time. The drop in consumer prices is, to a large degree, already in the rearview mirror, driven by a June decline in crude oil and gasoline prices that has already reversed. Crude futures are up around 20% from the end of last month, and the daily average price of regular unleaded gasoline is more than 6% higher. At the time of writing, the U.S. and Iran were in the midst of another flare-up in the five-month-old war, and hostilities were spreading to new parts of the Middle East.

For central bank watchers, the core personal consumption expenditures deflator, which the Federal Reserve watches closely, was probably Thursday’s most heartening development. The index rose 0.13%, to be precise, from May. (I’ve written the number to the second significant digit to show that, while the economist survey expected a 0.2% print, we missed that projection by only 0.02 percentage point.) The report benefited from large – and probably unrepeatable – negative contributions from idiosyncratic categories including hotels and nonprofit services provided to households. The latter is a so-called imputed category that provides very little practical information on a month-to-month basis.

Finally, we come to the demand side of Thursday’s data. Although annualized real gross domestic product growth slowed to 1.5%, the all-important consumer spending and fixed investment categories – together known as real final sales to private domestic purchasers or, sometimes, “core GDP” – accelerated to a 3.9% pace from 1.7%.

The consumption optics were particularly cheery, since they seemed to signal that the economy’s strength was more than just artificial intelligence investment. Maybe, maybe not. The World Cup may have been a factor, as was an unusual and probably fleeting jump in “other nondurable goods,” driven, according to the Bureau of Economic Analysis, by prescription drugs.

Whatever went on with second-quarter consumption, it’s probably not sustainable. Personal savings as a percentage of disposable personal income fell to 2.7%, the lowest since the second quarter of 2022. With that exception, we haven’t seen such meager savings rates since just before the financial crisis.

It’s tempting to celebrate a “Goldilocks” stretch of June data, but we’d all be well-advised to wait to pop the champagne. Reality is likely to strike back in the macroeconomic data over the next few weeks.

Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.