Stable growth, stubborn inflation: Q2's GDP, inflation reports preview
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Thursday's GDP and inflation reports are expected to reinforce the Federal Reserve's dilemma: Economic growth is holding up, while inflation remains too hot for comfort.
Why it matters: Growth that's resilient enough to withstand high borrowing costs, paired with inflation that remains above target, would reinforce the case for keeping monetary policy restrictive.
What to watch: Economists forecast that the U.S. economy grew at a 1.8% annualized pace in the second quarter, slowing modestly from the 2.1% rate in the January-March period.
- They also expect the Personal Consumption Expenditures (PCE) Price Index — the Fed's preferred inflation gauge — to decline 0.1% in June from the prior month as gasoline prices declined, leaving the annual inflation rate at 3.7%.
- Excluding the more volatile food and energy categories, core PCE is expected to rise 0.2% for the second straight month, with the year-over-year rate easing slightly to 3.3%.
What they're saying: "GDP will likely show stable underlying growth," TD Securities economists wrote in a note this week.
- The economists anticipate strong AI-related investment and a rebound in consumer spending, even if the headline figure slows amid drags from trade and inventories.
- They add that inflation should look comparatively benign because of lower gas prices, but the energy backdrop has since worsened as Middle East fighting resumed.
Friction point: June's inflation report captured a brief lull in energy prices after Middle East tensions temporarily eased.
- Since then, fighting has resumed and oil prices have climbed again, meaning that the headline data may already feel somewhat stale by the time it's released.
The bottom line: If the consensus is right, the U.S. economy will have entered the second half of the year looking remarkably similar to the first, with resilient growth and stubborn inflation.
