Home Major Pairs US Core PCE Price Index Largely Unchanged in July 2017

US Core PCE Price Index Largely Unchanged in July 2017

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Written By: Adrian Moore – Forex Focus

A look at some of the key indicators affecting personal consumption expenditures.

Core personal consumption expenditures (PCE) in the United States edged up by 0.1 percent in July, according to the data published by the Bureau of Economic Analysis (BEA). The core index rose by 1.4 percent year-on-year, lower than the previously reported 1.5 percent in June. The core PCE index, which measures consumer inflation for goods and services excluding volatile food and energy prices, has risen by a similar number for the last three months and is the preferred inflation measure of the US Federal Reserve. The heavyweight index, in addition to measuring the prices paid by consumers, also provides an indication of consumer spending, which accounts for nearly two-thirds of the economic activity in the US.

The index, with 2009 as the base year, expanded to 110.78 at the end of 2016, a rise of about 11 percent during the seven years. PCE on goods recorded a rise of only 1.2 percent, with expenditures on durable goods registering a sharp fall from 100 in 2009 to 88.46 at the end of 2016, as expenditures on durable household equipment fell to 84.51—offsetting the gains made in the purchases of motor vehicles and accessories, which rose to 109.65 during a similar period. The other sectors that had a hard landing were recreational goods and vehicles, sliding to 66.78 in 2016 from the base index of 100 in 2009, and telephone and related equipment, crashing to 60.53. Personal consumption of non-durable goods fared better, with the index recording a steady year-on-year growth led by pharmaceuticals, tobacco and expenditures on magazines, newspapers and stationery. The index expanded from 100 in 2009 to 107.8 at the end of December 2016.

Source: BEA

The price index for services was the best performer, with the index expanding to 115.87 on the back of household consumption expenditures, utilities, rental, healthcare, recreation, accommodation, financial services, household and other insurance, educational services, postal, delivery and social services. The largest expenditure was on educational services, with the price index escalating more than 30 percent in the last seven years.

Since the start of this year, PCE figures have generally remained in the 1.4-1.6 percent range for a 12-month period, after rising to 1.8 in the first two months of 2017. The declining PCE numbers pulled the core CPI (Consumer Price Index) lower, with consumer inflation showing a high degree of positive correlation to the price index on personal consumption expenditures.  The core Consumer Price Index was at a two-month low, with the July numbers coming in at 1.7 compared to the year earlier, after peaking at 2.7 percent in February of this year

Source: BEA

The weakness in personal expenditures on consumption activities can be attributed to the slow growth in personal income. Although household income rose 0.4 percent in July, higher than the market estimates of a 0.3-percent increase and the largest increase since February of this year, the low month-on-month growth in wages and salaries has led to a decline in disposable income, thereby squeezing household expenditures.

Based on the July figures for personal income, disposable income and PCE put out by the BEA, the 0.4-percent month-on-month rise in personal income has led to a 0.3-percent increase in disposable income, raising personal consumption expenditures by $44.7 billion, or 0.3 percent in current dollar terms. The income numbers bounced back in July after remaining unchanged the previous month.

Real PCE, which measures the dollar value at 2009 levels, rose 0.2 percent in July, in line with a 0.2-percent increase in disposable personal income. The figures in terms of the dollar value recorded an increase of $29.3 billion in July, with expenditures on goods rising by $18.7 billion and services by $11.8 billion. The rise in consumer spending was also buoyed by households tapping into their savings, pushing the dollar value of savings down to less than six-month lows.

Household spending is likely to expand in the US as employment figures continue to remain robust and at record levels. The weekly jobless claims measured by the four-week moving average fell by 1,250 claims in the last week of August to the lowest since May of this year. Total claims in the US are now below 300,000 for 130 weeks in a row, logging in the finest labour market performance since 1970.

The US Federal Reserve increased interest rates in March and June of this year, with the core CPI figures standing at 2.5 and 2.2 percent in January and April respectively. Since then, consumer inflation has steadily declined and is currently below the Fed’s target rate of 2 percent. Most of the economists surveyed expect the year-on-year inflation rate in the US to recede further in the near-term before gathering steam, making it an easy decision for the Fed to pause its tightening policy with regards to interest rates and focus on its balance sheet instead. The FOMC (Federal Open Market Committee) meeting is scheduled for September 19-20, 2017.


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