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Our base case forecast has core PCE inflation at 1.9% from November 2018 through July this year.
We already have a pretty good idea of what happened to consumers' spending in March, following Friday's GDP release, so the single most important number in today's monthly personal income and spending report, in our view, is the hospital services component of the deflator.
Here's something we didn't expect to write: The CPI measure of goods prices, excluding food and energy, rose in the three months to January, compared to the previous three months. OK, the increase was marginal, a mere 0.3%, but conventional wisdom has assumed for some time that the strong dollar would push goods prices down indefinitely.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
The biggest surprise in the recent inflation numbers has been the surge in the PCE measure of hospital services costs, where the year-over-year rate has jumped to 3.8% in February, an eight-year high, from just 1.3% in September.
We have argued recently that the year-over-year rates of core CPI and core PCE inflation could cross over the next year, with core PCE rising more quickly for the first time since 2010.
The headline employment cost index has been remarkably dull recently, with three straight 0.6% quarterly increases. The consensus forecast for today's report, for the three months to December, is for the same again.
The delay in the processing of personal income tax refunds this year appears not to have had any adverse impact on retail sales, so far. Indeed, the Redbook chainstore sales survey suggests that sales have accelerated over the past few weeks.
Our core view on the May payroll number remains that the single most likely cause of the unexpectedly modest increase is a seasonal adjustment error, triggered when the survey is conducted early in the month.
Last Friday's August auto sales numbers were overshadowed by the below-consensus payroll report and the six-year high in the ISM manufacturing index, but they are the first data to reflect the impact of Hurricane Harvey.
We read the same polls, newspapers, and political websites as everyone else, and we're not claiming any special insight into the outcome of the midterm elections today.
In the wake of April's 0.2% increase in real consumers' spending, and the upward revisions to the first quarter numbers, we now think that second quarter spending is on course to rise at an annualized rate of about 3.5%.
The closer we look at the data, the more convinced we become that the rollover in CPI physicians' services prices, which has subtracted nearly 0.1% from core CPI inflation since January, is a response to sharply higher Medicare part B premiums, especially for new enrollees.
The April FOMC statement dropped the March assertion that "global economic and financial developments continue to pose risks" to the U.S. economy, even though growth "appears to have slowed". Instead policymakers pointed out that "labor conditions have improved further", perhaps suggesting they don't take the weak-looking March data at face value. We certainly don't.
Today's JOLTS survey covers August, which seems like a long time ago. But the report is worth your attention nonetheless.
For the past six years, the PCE measure of core inflation has undershot the CPI version. The average spread between the two year-over-year rates since January 2011 has been 0.3 percentage points, and as far as we can tell most observers expect it to be little changed for the foreseeable future.
Today brings the April PPI data, which likely will show core inflation creeping higher, with upward pressure in both good and services. The upside risk in the goods component is clear enough, as our first chart shows.
At least some investors clearly were expecting Fed Chair Powell yesterday to offer a degree of resistance to the idea that a rate cut at the end o f this month is a done deal.
Before last November's election, movements in the headline NFIB index of activity and sentiment among small businesses could be predicted quite reliably from shifts in the key labor market components, which are released in advance of the main survey.
December's retail sales numbers are the most important of the year for retailers, but they don't necessarily tell us anything about the future prospects for consumers' spending or the broad economy. The December 2016 numbers, however, might be different, because they capture consumers' behavior in the first full month after the election.
The consensus forecast for the October core CPI, which will be reported today, is 0.2%. Take the over. Nothing is certain in these data, but the risk of a 0.3% print is much higher than the chance of 0.1%.
The shortfall in nominal wage growth, relative to measures of labor market tightness, remains the single biggest mystery of this business cycle.
In the excitement over the FOMC meeting--all things are relative--we ran out of space to cover some of this week's other data, notably the PPI, industrial production and housing starts. They are worth a recap, given that only the Michigan sentiment report will be released today.
The strong dollar is pushing down goods prices, but not very quickly. As a result, the sustained upward pressure on rents is gradually nudging core CPI inflation higher. It now stands at 1.9%, up from a low of 1.6% in January, and even relatively modest gains over the third quarter will push the rate above 2% by year-end. We can't rule out core CPI inflation ending the year at a startling 2.3%.
The minutes of the September 19/20 FOMC meeting record that "...it was noted that the National Federation of Independent Business reported that greater optimism among small businesses had contributed to a sharp increase in the proportion of small firms planning increases in their capital expenditures."
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
After three straight 0.3% increases in the core CPI, we are in agreement with the consensus view that September's report, due today, will revert to the 0.2% trend.
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