MNI 5 THINGS: Upside Risk To US Core PCE Price Index

By Holly Stokes

     WASHINGTON (MNI) - The Personal Income and Outlays report for May will be

released Friday, with the median forecast among analysts in an MNI survey

calling for a 0.4% rise in both personal spending and personal consumption,

alongside a 0.2% rise in the core PCE price index.

     Ahead of the release, we outline five themes for particular attention:

--HISTORY OF UNDERESTIMATING CORE PCE PRICE INDEX

     Analysts are expecting core PCE price index to rise 0.2% month/month in May

for the fourth month in a row. However, recently analysts have shown a tendency

to underestimate the core PCE price index. In the past year, analysts have

underestimated the index five times, and only overestimated it three times.

While there is an upside risk to analysts' estimate of +0.2%, it is worth noting

that analysts usually underestimate by a only small degree - missing by just

0.1pp in the past year.

--PCE PRICE INDEX YEAR/YEAR COULD REACH FED TARGET

     With a forecast for core PCE price index to rise 0.2% month/month, many

analysts expect the year/year pace to accelerate to 1.9%. However, depending on

the strength of the unrounded core PCE price index, a very strong 0.2%

month/month could yield a 2.0% year/year gain. And, given analysts' history of

underestimates, a 2.0% year/year could be a real possibility. This would be the

first time that the Fed's preferred inflation measure hits the 2.0% target since

April 2012. If a 2.0% gain is realized, markets will likely take this as further

confirmation for four hikes in 2018 and short-end rates markets will sell-off.

However, with all eyes on the Nonfarm Payrolls Report next week, market reaction

will likely be muted.

--RETAIL SALES SUGGEST SPENDING STRONG

     In May, retail sales jumped 0.8%, twice the gain that analysts had

forecasted. This jump in consumption was boosted by underlying strength in the

core retail sales categories, which feed directly into PCE. Consequently,

analysts are expecting May personal spending to show robust growth, with the

median forecast landing at a 0.4% gain and many analysts predicting a 0.5% rise.

Following a 0.6% increase in April, this would set the second quarter PCE up for

a strong rebound after a lackluster first quarter. However, spending on services

remains more of a wild card. In particular, CIBC points to a potentially weaker

utilities print in May, after the Industrial Productions report showed a

softening after two months of strong gains. 

--SAVINGS RATE COULD CONTINUE DOWNWARD TREND

     Last month, attention returned to the savings rate, as the measure dipped

back to 2.8% after hovering at or above 3.0% for the prior three months. In

2017, analysts were quick to note the rapid decline of personal savings relative

to disposable income, as the measure fell to potentially dangerous low levels.

Amidst high consumer confidence, there has been a recent negative relationship

between average hourly earnings and the savings rate, where consumers appear to

be spending at a faster rate than their incomes rise. Analysts expect this trend

to continue in May, with the large 0.8% gain in retail sales suggesting no pull

back in spending. 

--ENERGY TO BOLSTER PCE PRICE INDEX

     Headline PCE Price Index is expected to rise 0.2% month/month and lift the

year/year up to 2.2%, with energy prices a key factor. The already released 0.9%

gain for May CPI energy suggests another month/month gain for PCE price index

energy goods and services, albeit weaker than the month prior when CPI energy

rose 1.4% and PCE price index energy rose 1.5%. Further, year/year is expected

to receive a considerable lift from a positive energy print on base effects, as

May of 2017 saw a dramatic 3.1% fall in PCE energy prices month/month. 

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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