US: Core PCE inflation recovered in October – Nomura

US core PCE inflation was +0.2% (+0.207%) m-o-m in October, in line with the consensus of 0.2% but slightly higher than Nomura’s forecast of +0.179% on an unrounded basis, points out the research team at Nomura.

Key Quotes

“Moreover, revisions to the prior months were positive, but the upward revisions were concentrated in September as core PCE inflation for September was revised up to +0.2% (+0.151%) m-o-m, from a preliminary number of +0.1% (+0.129%). On a 12month basis, core PCE inflation remained at 1.4% in October but inched up to 1.447%, from 1.358% in September and 1.306% in August, on an unrounded basis.” 

“The slightly stronger-than-expected reading of core PCE inflation for October, along with the upward revisions to the prior months, should ease the FOMC's concerns over low inflation and increase the likelihood of three hikes in 2018 as we currently expect after the likely next rate hike in December this year. The Fed likely sees the weakness in core inflation over the first half of this year as transitory. The October monthly PCE inflation data reinforce that view.” 

“Both nominal income and spending increased at a healthy pace in October. Personal income increased 0.4% m-o-m, slightly above expectations (Nomura and Consensus: 0.3%). Personal spending rose 0.3%, in line with market consensus but slightly lower than our forecast (Nomura: 0.4%, Consensus: 0.3%), after a downwardly-revised 0.9% increase for September (previously reported as a 1.0% increase).”

“The slowdown from the previous month suggests post-hurricane replacement demand has mostly receded. In particular, spending on autos fell 0.8% in October after a sharp 8.6% increase in September, which was likely distorted by vehicle replacement demand following the hurricanes. Nominal spending on gasoline and fuels fell as retail gasoline prices declined from a weather-driven high in September. Elsewhere, for most other product categories, consumer spending rose at a steady pace. Healthy job creation and low unemployment will likely remain supportive for elevated momentum in Q4.” 

“GDP tracking update: The increase in real consumer spending in October was slightly weaker than we expected and September was revised down. This implies less real personal consumer expenditure growth in Q4. As a result, we lowered our Q4 real GDP tracking estimate by 0.2pp to 2.4% q-o-q saar.”