The US Personal Consumption Expenditures (PCE) price index increased 2.5% in July compared to the previous year, matching June’s rise, according to the Bureau of Economic Analysis. Excluding volatile food and fuel costs – the Federal Reserve’s preferred measure – the index also held steady at 2.6% annually.
This marks the third consecutive benign PCE inflation report. Trimmed mean and median inflation rates – other measures closely monitored by the Fed – also rose at a 2% annual rate. After several strong inflation reports earlier in the year, these recent reports provide a counterbalance. Additionally, data from the Federal Reserve Bank of San Francisco indicate that the high inflation readings earlier this year were driven by supply-side factors, which monetary policy typically overlooks since these shocks tend to be transitory.
Last week, the Fed signaled it would begin lowering rates from their 23-year high in September, stating that “the time had come for policy to change.” Some market watchers argue that the Fed is behind the curve and should cut rates by 50 basis points, but I don’t share this view. Several Federal Open Market Committee (FOMC) members have indicated that they are still deliberating on the rate cut decision, and the Fed will want to ensure the move reflects a consensus. A 50 basis point cut could lead to hawkish dissent, signaling that the central bank believes there is a problem and is playing catch-up, which could undermine confidence in the economy. Although the Fed insists that political considerations do not influence its decisions, the last thing it would want is increased focus on monetary policy heading into the November election.
Finally, while the economy is slowing, there are signs the Fed could engineer a soft landing. Payroll growth has slowed, especially if the large estimated March revision is confirmed by more recent data. Overall, the economy looks solid, with Q2 real GDP growth revised up to 3%. Recession fears seem overdone.
Outlook for Canada
In Canada, real GDP rose at an annual rate of 2.1% in Q2, slightly surpassing consensus expectations and well above the Bank of Canada’s earlier estimate of 1.5%. However, the monthly number indicates the economy is slowing – June was flat, and July looks similar based on the preliminary flash report. Although the Bank was light in its Q2 growth forecast, its 2.8% call for Q3 is looking optimistic.
Much of the Q2 gains were driven by real government spending, which was up a whopping 6.7%, while consumer spending rose just 0.6% and housing fell 7.3%. In a shift from recent trends, business investment was up, growing at 11.3%.
The personal saving rate increased 7.2%, up from 6.7% in Q1, reaching its highest level since the mid-1990s, excluding the pandemic years where we had large government transfers. This suggests that consumers are positioning themselves for higher mortgage rates in 2025 and 2026.
Given that government spending was the key driver of Q2 growth, and that June and July data suggest economic sluggishness, there is nothing in this report that should deter the Bank of Canada from cutting interest rates by 25 basis points this week.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Is restrictive zoning worsening the housing shortage?
While the federal government pushes for greater housing density as part of its strategy to combat the affordable housing crisis, local zoning policies often stand in the way. Homeowner concerns over property values frequently influence restrictive zoning decisions, creating barriers to development. Despite federal incentives like the $4 billion Housing Accelerator Fund, conflicts persist between municipalities and residents when it comes to zoning changes. Our latest Housing Affordability Watch post explores how these tensions are shaping the housing landscape. Read it here: A Fly in the Ointment
Independent Opinion
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