US PCE outlook for August: Core inflation may accelerate slightly, how will the Fed assess it?

Whether it is the interest rate dot plot or the latest speech, there are significant differences within the Federal Reserve on the future policy path.

On Friday local time, the United States will release the August Consumer Price Index (PCE).

With the implementation of the interest rate cut, the importance of inflation data has weakened given that the Federal Reserve has repeatedly mentioned that the risks of dual responsibilities are increasingly balanced. However, considering the resistance and uncertainty faced in the future price movement towards 2%, the unexpected increase in data may bring greater uncertainty to the path of loose policy after the first interest rate cut.

Core PCE may rebound

Data released by the U.S. Department of Commerce last month showed that the overall personal consumption expenditure (PCE) price index and core PCE rose 2.5% and 2.6% year-on-year in July, both of which were the same as the increase in June.

Yicai summarized the forecasts of Wall Street institutions and found that after referring to the latest CPI and PPI data, PCE in August may increase by 2.3% year-on-year, hitting a new low since 2021, and increased by 0.2% month-on-month. Against the backdrop of basically stable food prices, energy prices are expected to become the main driver of price declines. Affected by increased supply and concerns about demand, international oil prices fluctuated and fell last month. According to data from the American Automobile Association (AAA), gasoline prices in the United States fell by an average of about 3% in August.

It is worth noting that as an indicator that the Federal Reserve pays more attention to, the core PCE growth rate, which does not consider energy and food, may accelerate by 0.1 percentage point to 2.7%.

In a report sent to the reporter of China Business Network, Wells Fargo said that judging from the July CPI report, the rebound in rent prices and the increase in service costs such as tourism and leisure will bring disturbances. At the same time, the unfavorable base effect also brings stickiness to the data. The Atlanta Federal Reserve tool shows that the US PCE may continue to remain at around 2.7% in September.

Personal income and personal expenditure monthly rates are also announced at the same time as PCE. Both are of great reference significance for predicting future price trends. The agency predicts that the monthly income rate will accelerate to 0.4% and the monthly expenditure rate will fall from 0.5% to 0.3%.

Wells Fargo believes that the resilience of American consumers has continued to surprise since the beginning of this year. The combination of slowing inflation and steady income growth has helped support consumers, but it cannot fully explain the increase in spending. The bank found that spending growth exceeded income for the sixth consecutive month in July, bringing the savings rate down to 2.9%. This is the second time since 2008 that the savings rate has fallen below 3.0%, indicating that consumers have lowered the priority of saving in order to increase spending.

Overall, Wells Fargo expects consumer spending to face further pressure before the end of the year as a weak labor market leads to slower wage growth. If households continue to consume, savings will deteriorate further, making consumers more economically vulnerable over time.

Multiple factors may affect the pace of interest rate cuts

A week ago, the Federal Reserve opened a new round of interest rate cuts by 50 basis points.

However, the future policy path still depends largely on data. Federal Reserve Chairman Powell reiterated the position of the decision of this meeting and emphasized that multiple future employment reports and inflation data will have an impact on the policy of the meeting in early November.

Bob Schwartz, senior economist at the Oxford Economics Institute, said in an interview with Yicai previously that the initial stage of the Fed's normalization cycle was more aggressive than expected as the Federal Open Market Committee (FOMC) shifted its attention from inflation to the labor market. Given the weakness in the job market, the dual mandate has begun to tilt again.

With the next meeting still a month and a half away, Schwartz believes that the Fed may be worried that overly cautious actions may fall behind the curve. Historically, when the labor market begins to collapse, the economy will inevitably decline. While low-income groups are under pressure, it is uncertain how long the strong wealth growth of middle- and high-income groups can continue to drive consumption.

In fact, whether it is the interest rate dot plot or the latest speech, there are considerable differences within the Fed on the future policy path. Fed Governor Bowman, who voted against the meeting in September, said this week that the possibility of stagnation in progress in fighting inflation cannot be ruled out.

It should be noted that the S&P US Purchasing Managers (PMI) index released on Monday showed that cost pressures on the corporate side have increased. With the continued decline in manufacturing and a worrying decline in business confidence, some warning lights are flashing, especially in terms of economic growth's reliance on the service industry," said Chris Williamson, chief business economist at S&P Global Market Intelligence, adding that the renewed acceleration of inflation shows that the Fed cannot shift its attention away from its inflation target while seeking to maintain economic improvement. Boris Schlossberg, macro strategist at asset management firm BK Asset Management, told Caixin that hawkish members of the Fed still believe that there are some upside risks to inflation. "With the continued pressure on housing and service costs re-emerging, the path to normal inflation has encountered setbacks. Coupled with the potential uncertainty of the general election, this may keep the Fed cautious in its policy options at the remaining two meetings of the year." Schwartz expects that after a 50 basis point rate cut, if the economy can run as the Fed predicts, only a 25 basis point rate cut may be needed in November and December. If there are any surprises in the labor market before the US election, the balance in November will again tip toward a 50 basis point rate cut.