US Dollar Sanguine As Fed’s Favorite Inflation Gauge Remains Tepid

Talking Points:

• Personal Consumption Expenditure Core at 1.3% in August, Under Fed’s Target
• The FOMC’s target for inflation is 2%, well below the PCE and other key inflation reads
• August US Pending Home Sales dropped, weighing the Dollar lower

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The US Dollar was little affected by the US Personal Consumption Expenditure (PCE) inflation figures for August. The core PCE release of 1.3 percent met expectations of an uptick from the previous month’s 1.2 percent pace. The PCE Core numbers are the preferred gauge of inflation used by the Fed; and without a deviation from what was expected, rate speculation would find little resolution in the debate over timing the first hike.

The PCE Core reading of 1.3 percent is running under the Fed’s target inflation rate of 2 percent, reinforcing comments by San Francisco Fed President Williams when he weighed in on the below-objective price pressures. A similar concern of inflation running somewhat below the Committee’s 2 percent objective was voiced by Richmond Fed President Lacker. While there has been downward pressure on inflation from declining oil prices and the appreciation of the dollar, Fed Chairwoman Yellen said last week in her lecture in Massachusetts that she expects these factors on inflation will likely prove transitory.

Following the release of the PCE inflation data, US Pending Home Sales statistics seemed to motivate a little more action from the greenback. The August reading unexpectedly dropped -1.4 percent versus 0.4 percent growth forecasted. The year-over-year pace slowed to 6.7 percent versus 8.1 percent expected.