Core PCE and Spending

February 26th, 2016 10:52 am | by John Jansen |

Via Millan Mulraine at TDSecurities:

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  • Core PCE rose at a relatively firm 0.3% m/m pace in January, and along with the upward revisions to prior months, the annual pace of core PCE inflation jumped to 1.7% y/y.
  • Personal spending activity also rebounded strongly, advancing at a robust 0.5% m/m pace with real spending advancing at an impressive 0.4% m/m pace.
  • The firming in core PCE inflation along with the stronger than expected performance in consumption activity should go a long way in underpinning the Fed’s confidence in the outlook for growth and inflation.

The core PCE index rose at a stronger than expected 0.3% m/m pace in January (up 0.259% m/m at 3 decimal places), marking the biggest monthly gain in this indicator since January 2012. This was well above the more modest 0.2% m/m rise expected by the markets, and along with the upward revisions to the prior estimates it reflects a more dramatic firming in core inflation momentum than expected. On a year ago basis, the core PCE inflation rate skyrocketed to 1.7% y/y from the upwardly revised 1.5% y/y print the month before. This brings the pace of core PCE inflation rate (the Fed’s preferred inflation measure) to its highest level since February 2012. The 3M and 6M annualized pace also rose strongly, up to 2.0% from 1.1% and to 1.6% from 1.3%, respectively.

The performance in the real economy was equally impressive, with personal consumption activity rising at an very robust 0.5% m/m pace in nominal terms, and 0.4% m/m in real terms. This was well ahead of the market consensus for a more modest advance, and it points to a sharp rebound in spending momentum to start the year after the disappointing performance to end last year. From a GDP accounting perspective, the strong start to the year in household spending has resulted in pushing our current tracking for Q1 GDP from 2.1% q/q to 2.5% q/q. The strong gain in spending was supported by the 0.5% m/m gain in personal income, which resulted in a similar advance in personal disposable income. The savings rate held steady at 5.2%.

On the whole, the better than expected performance in consumer spending activity in January, and the stronger than expected showing in core PCE inflation (along with the upward revision to December) does point to some firming in domestic growth and inflation momentum. Both should go a long way in reassuring the Fed on the outlook for growth and inflation. Nevertheless, we expect the Fed to remain on the sidelines at the March meeting awaiting further confirmation that the upswing in growth and inflation momentum is being sustained.

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