US inflation back to undershooting 2 per cent ahead of FOMC meeting

A note from JP Morgan economists on this morning’s release of the Personal Income and Outlays report for March, in which both the consumption and inflation measures arrived weaker than expected (our bold):

On consumption, real consumer spending increased 0.3% in March while nominal spending was basically unchanged. These figures were softer-than-expected and included a 6.5% surge in real spending on household utilities. Excluding this jump (which was weather-related), overall real spending ticked up only 0.1% in March. … Elsewhere in the report, the core PCE deflator declined 0.138% in March, bringing the year-ago change in the index down from 1.77% in February to 1.56% in March. The March figures were close to, although slightly below, expectations. They are still notable, however, because the monthly change was the second weakest on record. Even excluding the very large drop in prices for cellular telephone services (which we estimate subtracted 0.08%-pt from the monthly change in the core PCE deflator), it still looks like March was a weak month for core inflation. The headline PCE deflator was also weak, declining 0.2% in March.

A chart via Fred shows the recent dip in the year-on-year change for the Fed’s preferred inflation measure, the PCE price index — both core (blue) and headline (red):

After a steady increase since the autumn of 2015, headline inflation had finally hit the Fed’s 2 per cent target in February before falling again beneath it. Core inflation had been rising at a shallower slope and fell from 1.8 per cent to slightly less than 1.6 per cent. The gang at Capital Economics explains the surprising extent of the decline as entirely down to two items, the aforementioned price competition in cellular services and the entry of a supply glut of used cars, which has been anticipated:

For those keeping score:

— The advance estimate of US first quarter GDP was an annualised 0.7 per cent

— Nonfarm payroll employment in March climbed by just 98,000

— Both the core and headline readings of the Fed’s preferred measure of inflation fell more than expected in March, as noted by the JP Morgan economists

— Consumption in March disappointed, also highlighted above

All of these lacklustre readings have attendant caveats. The GDP report for the first quarter is likely distorted by ongoing seasonality issues, perhaps to the point of uselessness. Payroll growth would have been higher were it not for the temporary weather-related effects of a snow storm in the northeast, and some economists and strategists also believe that the US labour market is now at full employment. Most of all, each of these individual reports is noisy and subject to revisions later on.

Still, these indicators all show tentative signs of renewed macroeconomic sluggishness consistent with the idea that, at least for now, hard data is beating sentiment.

Just something to keep in mind ahead of this week’s FOMC meeting, in which the Fed is expected not to make any policy changes but might well update its assessment of the economy in its statement.

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