US personal consumption inflation nears Fed target
A key measure of US inflation has risen to the Federal Reserve’s target for the first time in a year, lifting market expectations for future US interest rate rises.
Growth in March's personal personal consumption expenditures index picked up to 2% compared to a year ago, from a 1.7% pace in February, as economists expected. This was despite no change movement month-on-month between the headline PCE index.
Core PCE inflation, the Fed’s preferred measure of inflation, reached 1.9% from 1.6%, in line with the market forecast, as the core PCE deflator rose 0.2% on the month.
Nominal spending rose 0.4%, as expected, but real spending was a tenth weaker than consensus, rising 0.4%.
The rise in spending was broad-based, but the headline was flattered by a 9.9% monthly leap in energy services due to the weather.
A pick-up in household spending amid steady income growth was the picture on the consumption side of the report, amid a drawdown in the savings rate.
Nominal personal income increased 0.3% on the month, a touch softer than the consensus forecast, led by increases in rental and proprietors’ incomes. Growth in wages and salaries, however, moderated to 0.2% from 0.4%.
On the spending side, nominal personal spending rose 0.4%, in line with the market forecast, and adjusted for inflation, real personal spending was also up 0.4%.
Barclays noted deflation in durable goods prices continues to broadly offset services inflation, though economists at the bank expect annual rates of inflation to gradually improve.
"In the near term, this is largely a byproduct of the passing of base effects and transitory weakness in some categories from a year ago. Looking further out, we expect some build-up of upward pressure on inflation from the effects of the tax cut, rising crude prices, a weaker dollar, and anti-trade policies out of the Trump administration, to at least partly offset the structural and industry-specific factors that are holding down goods inflation."
Pantheon Macroeconomics said the robust March spending numbers set up a decent base for the second quarter, but highlighted the rise in hospital services inflation as potential "trouble" for the Fed.
Further base effects mean the year-on-year rate in the PCE deflator is likely to hit the Fed's 2.0% target in May or June, Pantheon said, with a potential breach in July.
This is felt to be especially likely if hospital services inflation keeps rising after a 0.3% gain on the month that lifted the yearly rate by two tenths to 3.6%, the highest since April 2010.
"As far as we can tell, this explosion in hospital services inflation is a reaction to the abandonment last year of plans to force hospitals to offer certain common procedures at a "bundled" price under Medicare and Medicaid, rather than charging for each item. We don't know far the subsequent jump in prices will go, but the increase so far has been startling, and it is narrowing the gap between the /y rates of core CPI and core PCE inflation.
"If this continues, it will spell trouble for the Fed."