US: Headline PCE inflation to post a 0.02% m-o-m increase - Nomura

Analysts at Nomura expect a 0.02% m-o-m increase or no change in US headline PCE inflation after rounding (Consensus: 0.0% m-o-m) and if realized, the year-over-year rate would be1.4% (Consensus: 1.3% y-o-y).

Key Quotes

“Note that the BEA revised PCE inflation data for the recent three years along with annual revisions to GDP on 28 July. However, the revised monthly profile of PCE inflation has not been released. Thus, we left our m-o-m inflation forecasts for both headline and core PCE price indices unchanged. On a y-o-y basis, we slightly revised up our forecasts  for both metrics to reflect the impact from the revisions.”

“Based on relevant components of the June CPI and PPI reports, we forecast a 0.1% (0.098%) m-o-m increase in the core PCE price index in June (Consensus: 0.1% m-om), which would lead to a 1.5% increase in its 12-month change rate (Consensus: 1.4% y-o-y). We believe that the recent softening of core inflation has the potential to affect the future path of the policy rate more than the Fed’s balance-sheet policy. We continue to expect the Fed to announce a change to its reinvestment policy at the September FOMC meeting. Along with the argument that the balance-sheet reduction could be a substitute for a rate hike, the recent decline in core inflation might lower the possibility of the next rate hike coming in September.”

“Further, the FOMC statement after its July meeting contained sharpened characterization of the recent decline in inflation. It said that overall and core inflation measures “have declined and are running below 2 percent.” In contrast, the previous statement said that inflation was running “somewhat below 2 percent.” This slight change sounds more definitive and appears in line with our view that the likelihood of a September hike remains low. Against this backdrop, we continue to expect the FOMC to raise short-term interest rates next at its meeting in December.”

“Our forecast is driven by expected weak food and energy PCE inflation. Food-at-home prices in the June CPI report fell 0.1% m-o-m, portending weak inflation of PCE food prices. We expect the PCE inflation of energy prices to remain soft, considering weak CPI energy prices that fell again in June.”