MNI DATA PREVIEW: Aug Core PCE Prices Seen +0.2%; Above Trend

By Holly Stokes and Sara Haire

HIGHLIGHTS:

-The August core PCE price index is expected to see a gain of 0.2%. 

-A slip in the Y/Y Core PCE price index, remaining under the Fed's 2.0% is no

reason for analysts to change their expectation of a rate hike in December. 

-Despite hurricane Harvey causing gas prices to rise as seen in retail sales

data, it will not be enough to offset an expected decline in auto sales and

utilities consumption, thus softening personal spending down. 

-This softer growth in personal spending is expected, as it has been growing

above trend from 2014 to 2016.

-Analysts are attributing a modest rise in personal income due to observed soft

wage and job growth.  

     WASHINGTON (MNI)- Analysts expect August core PCE price index to rise by

0.2% based on the previously-released PPI and CPI readings, breaking the trend

of 0.1% gains seen over the last three months, but the year/year rate should

remain below 2% and could even decline further. The analysts are also

forecasting both personal income and current PCE growth to slow in the months,

to 0.2% and 0.1% from 0.4% and 0.3% respectively in July. 

     Despite these movements, some analysts expect upcoming inflation reports to

propel a December rate hike, even if some of the expected inflation gains will

be seen a transitory following the hurricanes.   

     Morgan Stanley notes that the year-over-year rate is on "razor's edge"

based on the unrounded core PCE price index - if it comes in at Morgan Stanley's

expected 0.16%, the year over year will slip to 1.3% due to a strong gain in

August 2016. However, an upside miss of a tenth of a basis point will allow

year-over-year to hold steady at 1.4%. 

     As analysts speculate on whether the year-over-year will remain at 1.4% or

slip, the National Bank of Canada notes that either way it should be well below

the Fed's 2.0% target. However, several analysts remain optimistic - with

Amherst Pierpont stating that this pickup signals that soft readings earlier in

the year were likely a "fluke." 

     In addition to a rise in the core PCE price index, the total PCE price

index is also expected to post a considerable gain. Societe Generale is

predicting a boost due to a 2.8% increase in the seasonally adjusted energy

index, with rising gas prices being the key component. Other analysts from BMO,

CIBC, and Credit Suisse are all in agreement that headline PCE will see fast

growth from gas prices, not surprising as Hurricane Harvey's effects begin to

take shape.

     Current dollar PCE is expected to post a smaller gain of 0.1%, and given

inflation expectations this would mean real spending contracted. BMO notes that

after accounting for the expected small rise in inflation, real PCE would be

down 0.2% - its lowest reading in more than three and a half years. Soft

personal spending can be attributed to a mixture of mean reversion, softer gains

in personal income last month, and the impacts from Hurricane Harvey. 

     Credit Suisse states that the end of August's data is likely to be skewed

by Harvey lowering auto sales and utilities consumption. Societe Generale notes

that retail sales data shows a 1.6% decline in spending on autos, which will

amount to a drag on durable goods spending. However, according to the durable

goods report released Wednesday, there was a rise in both shipments and new

orders for motor vehicles in August, suggesting spending on autos will be on the

rise in the coming months. Capital Economics also confirms the impact of Harvey,

stating that power outages contributed to a 5% drop in utilities spending -

though cool temperatures on the East Coast may have also contributed to this

decline.

     While the already released retail sales report shows Harvey-boosted gas

prices to have increased spending at gas stations by 2.5%, analysts such as

Goldman Sachs doubt that this will be enough to fully offset Harvey's drag on

consumer spending in August. TD Securities agrees that Harvey may lead to a soft

personal spending report, but believes that markets will likely discount this

accordingly. However, Harvey should not be considered the only cause of soft

spending, as Credit Suisse notes that after growing above trend from 2014 to

2016, it should be expected that consumer spending will moderate further this

year.

     Generally, analysts expect a moderate 0.2% rise in personal income after

soft job and wage growth. CIBC notes that hours worked declined in August while

average hourly earnings posted only a modest gain, leading to a mere 0.1% rise

in personal income. However, Barclays disagrees, stating that an expected 0.4%

increase in wages and the small rise in proprietors' and rental incomes is

enough to push personal income up 0.3% - but still below July's 0.4% gain.

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

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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