MNI 5 THINGS:US Core Prices Seen +0.2%; No Clear Forecast Risk

By Shikha Dave and Harrison Clarke

     WASHINGTON (MNI) - The US Personal Income and Outlays report for July will

be released on Thursday, with the median forecast among analysts in an MNI

survey calling for a 0.2% rise in the core PCE price index, and a 0.3% gain in

personal income and a rise of 0.4% in current dollar PCE.

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

     --NO CLEAR RISE FOR CORE PCE PRICES 

     Analysts are expecting core prices to rise 0.2% in July. In the last year,

analysts have been fairly accurate in their estimate for the core PCE price

index, having been on target six times. They have underestimated core prices

four times, with an average underestimate of 0.1pp, and overestimated it only

twice, with an average overestimate of 0.1pp. This suggests that analysts are

likely to be on target for July's core PCE and also that if they do miss, it

will be by a small margin.

     --ENERGY MAY CONTINUE TO DRAG

     The Consumer Price Index for energy, which is a very strong correlate of

the PCE Price Index for energy, posted a 0.5% decline in July, indicating that

energy should be a drag on headline PCE prices. Although the CPI for energy is a

very strong indicator for the PCE Price Index for energy, the latter tends to be

slightly more volatile, so the anticipated decline may be greater in magnitude

than that of the CPI for energy. It should be noted that although the PCE Price

Index for energy will be coming off of subsequent gains in April and May, those

gains followed a steep 2.8% decline in March that the index number has not

recovered from yet. Despite this, the index is likely to increase year over

year.

     --CPI POINTS TO INCREASED CORE PCE PRICES

     Data released earlier in August suggest core PCE prices may have picked up

in July from a soft 0.1% June increase. The core CPI measure for July posted a

0.2% gain, which is expected to translate into a 0.2% rise in core PCE prices.

This would push the year over year rate back up to 2%, in line with the Fed's

inflation target. It should be noted, however, that core CPI and core PCE prices

have not been as tightly correlated in recent months as they have been

historically.

     --RETAIL SALES SUGGEST STRONG SPENDING 

     In July, retail sales increased 0.5%, coming in well above analysts'

expectations. This increase in consumption was driven by strength in the core

retail categories, which directly flow into PCE. The strength of these core

categories significantly offset the decline in July unit auto sales. As a

result, analysts are anticipating July personal spending to show a 0.4%

increase, continuing the positive trend in consumption.

     --PERSONAL INCOME UP

     Finally, data released earlier this month in the July payrolls report

suggest an increase in personal income for the month of July. Average hourly

earnings were up 0.3%, a faster pace of growth than the 0.1% gain in the

previous month. Additionally, nonfarm payrolls rose by 157,000 in July, a

smaller gain than in recent months, but still solidly positive. However, average

weekly hours worked declined to 34.5 hours from 34.6 hours in June, providing

some offset.

--MNI Washington Bureau; +1 202-372-2121; email: shikha.dave@marketnews.com

--MNI Washington Bureau; +1 (973) 494-2611; email: harrison.clarke@marketnews.com