Fed's key inflation indicator shows hawkishness here to stay

(Alliance News) - The US central bank's favoured inflation indicator ticked higher in August, which analysts believe will lead to another 75 basis point hike.

The personal consumption expenditures index increased by 0.4% in August against the previous month, following a downwardly revised 0.2% decline in July, according to estimates released by the US Bureau of Economic Analysis.

"The key takeaway from the report is that the inflation the Fed says it can control - core inflation - did not move in a friendly direction in August; therefore, market participants can continue to expect the Fed not to be their friend with monetary policy," Briefing.com said.

ING Chief International Economist James Knightley said: "In terms of today's US data flow, the Federal Reserve's favoured measure of inflation has come in higher than expected, which will keep the hawkish comments coming from Fed officials and reinforce expectations of a fourth consecutive 75bp interest rate hike on November 2."

On an annual basis, the US personal consumption expenditures index increased by 6.2%, slowing from a 6.4% annual rise in July.

Consensus, cited by FXStreet, was for a 0.3% monthly increase and a 6.6% yearly increase.

Capital Economics said: "Perhaps the more relevant news for the Fed was the stronger than anticipated rise in the PCE deflator. We already knew the back data was revised slightly higher, but the 0.3% rise in August was also stronger than the 0.1% rise in CPI.

"Despite having a much smaller weight for shelter, the core CPE deflator rose by 0.6%, with the inflation rate rebounding to 4.9%, from 4.7%. That will only serve to underline the Fed's hawkishness over the coming months."

ING said the monthly personal income and spending report is key for modelling GDP forecasts.

"Consumer spending makes up around 70% of all economic activity in the US - versus, say 55% to 60% in most European economies," ING explained.

"The monthly profile for US consumer spending is weaker than hoped in today's report with downward revisions to July real consumer spending, to negative 0.1% month-on-month from the initially reported 0.2% growth rate, while August spending came in at up 0.1% month on month versus expectations of up 0.2%."

By Paul McGowan; [email protected]

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