US: Inflation and income-spending in focus - RBS

Research Team at RBS, suggests that in the US session, investors will be keenly watching the release of US personal income and spending data in addition to the PCE deflator data.

Key Quotes

“The month-to-month growth in personal income looks to have slowed in August to just 0.1%, which would mark the smallest advance since February. Much of the cooling was due to wages and salaries. While payrolls in the month increased by 151,000, the average workweek declined to the shortest level since February 2014. As a result, the index of total hours worked fell in the August for the first time in six months. In addition, hourly earnings posted a below-trend increase of just 0.1%. These results suggest that aggregate wages and salaries may have advanced by a mere 0.1% in August, following four consecutive hefty increases.

Similarly, we look for the pace of consumer spending to have decelerated further, rising by just 0.1% in August, following gains of 0.5% and 0.3% in June and July, respectively. Retail sales were disappointing in the month, with weakness seen in across many categories including autos, building materials, furniture, non-store retailers, and gasoline. Meanwhile, outlays on services may have been restrained by a drop in household utilities expenditures (consistent with the fall in utility usage reported in the month). In inflation-adjusted terms, spending may have been flat to down slightly in August (and the gains in June and July could have been trimmed, as was the case with retail sales). The consumer sector appears to have less upward momentum in Q3 than previously thought. Given our forecast for August, we now look for real PCE to advance at a pace closer to 2 1/2% annualized in Q3 (compared with a gain of more than 4% in Q2).

On the inflation front, the CPI was higher-than-expected in August and we look for relatively firm PCE inflation figures as well (though not quite as high as the CPI). The core CPI advanced by 0.3%, the largest increase in six months. The upside surprise was in large part due to medical care, which jumped by 1.0%, the largest monthly increase since February 1984. Within medical care, large rises were recorded for prescription drug prices and hospital services. While the rise in medical care commodities in the CPI will feed through to the core PCE deflator, medical care services in the PCE core deflator are largely sourced from the PPI rather than the CPI. Thus, much of the outsized increase in that CPI component will not directly impact the PCE measure.

In the PPI, medical care services costs were relatively firm but not as strong as in the CPI. Also, in the core PCE deflator, hospital services costs get deducted from the Non-Profit Institutions Serving Households (NPISHs) category, further limiting the impact of higher healthcare costs on the core PCE. As shown in the table below, the relatively firm core CPI result provides an elevated base upon which to build our core PCE forecast, and the categories sourced from the PPI will also make a positive contribution. However, the NPISHs component and seasonal adjustment effect could provide a modest offset. On balance, we look for the core PCE index to have risen in August by 0.2% (+0.185% unrounded), which should be sufficient to lift the year/year rate from 1.6% to 1.7% (matching the February 2016 reading, which was the highest since September 2014). Assuming both food and energy prices are relatively little changed (similar to the CPI), the headline measure in August may also have been up by 0.2%.”