Core PCE inflation softens to 3.9% as forecast

Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, rose to 3.5% on a yearly basis in August from 3.4% (revised from 3.3%) in July, the US Bureau of Economic Analysis reported on Friday. This reading came in line with the market expectation.

The annual Core PCE Price Index, the Federal Reserve’s preferred gauge of inflation, rose 3.9%, a slightly softer pace than the 4.3% (revised from 4.2%) increase recorded in July. On a monthly basis, the PCE Price Index and the Core PCE Price Index increased 0.4% and 0.1%, respectively. Both of these figures came in below analysts’ estimates.

Further details of the report showed that Personal Income and Personal Spending both grew 0.4% on a monthly basis as expected.

Market reaction to US PCE inflation data

The US Dollar struggles to find demand after this report. As of writing, the US Dollar Index was down 0.25% on the day at 105.86. Meanwhile, the 10-year US Treasury bond yield was in negative territory at around 4.55% and US stock index futures were up between 0.5% and 0.7%.

US Dollar price today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the New Zealand Dollar.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		-0.41%	-0.48%	-0.45%	-1.02%	-0.15%	-1.19%	-0.35%
EUR	0.40%		-0.07%	-0.03%	-0.62%	0.25%	-0.79%	0.05%
GBP	0.47%	0.07%		0.04%	-0.53%	0.32%	-0.71%	0.12%
CAD	0.43%	0.04%	-0.04%		-0.58%	0.28%	-0.75%	0.08%
AUD	1.03%	0.60%	0.43%	0.59%		0.88%	-0.18%	0.65%
JPY	0.15%	-0.28%	-0.31%	-0.30%	-0.88%		-1.05%	-0.20%
NZD	1.20%	0.78%	0.71%	0.70%	0.18%	1.03%		0.83%
CHF	0.39%	-0.02%	-0.09%	-0.04%	-0.63%	0.20%	-0.84%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Economic Indicator

United States Core Personal Consumption Expenditures – Price Index (YoY)

The Core Personal Consumption Expenditures released by the US Bureau of Economic Analysis is an average amount of money that consumers spend in a month. “Core” excludes seasonally volatile products such as food and energy in order to capture an accurate calculation of the expenditure. It is a significant indicator of inflation. A high reading is bullish for the USD, while a low reading is bearish.

What to expect in the Federal Reserve’s preferred PCE inflation report?

The Core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, is forecast to rise 0.2% in August on month, matching the increase recorded both in June and July. The annual Core PCE Price Index is seen rising 3.9%, at a softer pace than the 4.2% increase registered in July.

The headline PCE Price Index is expected to grow 0.5% MoM in August, while the annual PCE figure is anticipated to edge higher to 3.5% following the 3.3% increase recorded in July.

The revised Summary of Economic Projections (SEP) published after the September Fed policy meeting showed that policymakers forecast one more rate hike before the end of the year. On an encouraging note, officials forecast more progress on taming core inflation in 2023 than they saw in June projections. “[The] majority of policymakers believe it is more likely than not another rate hike will be appropriate,” Fed Chairman Jerome Powell said in the post-meeting press conference.

Meanwhile, Fed Governor Michelle Bowman said that the continued risk of a further increase in energy prices could reverse some of the recent progress on lowering inflation.

Analysts at TD Securities offer their forecasts for the upcoming PCE data:

“We expect core PCE inflation to register a third consecutive 0.2% m/m increase in August; undershooting the core CPI’s stronger 0.3% gain. The y/y rate likely also fell to 3.9%, while we expect the key core services ex-housing series to slow to 0.2% m/m following July’s 0.5% surge. Conversely, we look for personal spending to lose speed, rising only 0.2% m/m — a three-month low.”

When will be the PCE inflation report released and how could it affect EUR/USD?

The PCE inflation report is due at 12:30 GMT. The CME Group FedWatch Tool shows that markets are still pricing in a 60% probability that the Fed will hold the policy rate steady for the remainder of the year. This market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event.

Generally, investors react to the monthly core PCE inflation reading since it’s not distorted by base effects and paints an accurate picture of the underlying inflation trend by stripping prices of volatile items. However, investors are growing increasingly concerned over rising energy prices since early summer because it makes it more difficult for the Fed to tame inflation. Hence, a higher-than-forecast increase in monthly PCE inflation could still provide a boost to the USD even if the Core PCE Price Index comes in line with the market consensus.

On the other hand, a soft monthly reading of 0.1%, or even lower, could hurt the USD with the immediate reaction. Since PCE inflation is a lagging data, however, investors might refrain from betting on a steady pullback in the USD. In September, crude Oil prices are up 10%, compared to the 2.2% advance seen in August, suggesting that investors are likely to wait until September inflation data before deciding whether the Fed will deliver one more rate increase before the end of the year.

FXStreet Analyst Eren Sengezer offers a brief technical outlook for EUR/USD and explains: “EUR/USD suffered heavy losses in the first half of the week and touched its lowest level since early January below 1.0500 before staging a rebound on Thursday. The Relative Strength Index (RSI) indicator on the daily chart climbed above 30, suggesting that the pair’s latest recovery was a technical correction rather than the beginning of a reversal. In the meantime, the pair remained within the descending regression channel coming from mid-July, confirming the bearish bias.”

Eren also highlights the important technical levels for EUR/USD: “On the upside, 1.0600 (upper limit of the descending channel) aligns as first resistance. If the pair manages to flip that level into support, 1.0660 (20-day Simple Moving Average (SMA), Fibonacci 23.6% retracement of the latest downtrend) could be set as the next recovery target before 1.0790-1.0800 (Fibonacci 38.2% retracement, psychological level). In case EUR/USD fails to clear 1.0660, sellers could retain control. In that scenario, supports could be seen at 1.0500 (static level, psychological level) and 1.0430 (static level from December).”

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Source: https://www.fxstreet.com/news/us-core-pce-inflation-preview-federal-reserve-preferred-price-indicator-expected-edge-further-down-202309290608