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Inflation Goes Astray in March as Personal Consumption Expenditure Index Disappoints

Inflation Goes Astray in March as Personal Consumption Expenditure Index Disappoints

Dylan Jusino, Contributor

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Talking Points:

- The Personal Consumption Expenditure Index (PCE) came in flat in line with estimates 1.6%; personal spending was stagnant for second month.

- Rate hike unlikely in May, no change in expectations.

- US Dollar dips below 99 but reverses shortly after

- See the DailyFX Economic Calendar for upcoming economic data and for a schedule of live coverage see the DailyFX Webinar Calendar.

Consumption in March largely disappointed as the Personal Consumption Expenditure Index (PCE) came in line with expectations and dipped from the month prior. PCE Core Yoy came in at 1.6% versus 1.8% in the previous month. Personal income and personal spending in the US missed estimates in March. The figures came in at 0.2% versus 0.3% and 0.0% versus 0.2% respectively.

The Personal Consumption Expenditure Index released by the Bureau of Economic Analysis is the Federal Reserve’s preferred inflation gauge. PCE, unlike the Consumer Price Index is based on a fixed basket of goods services. The report is valued for forecasting inflationary pressures. Taken in excess, high levels of consumption and production may lead to an overall increase in prices. Contrarily, persistently low Personal Spending may result in decreasing levels of output and an economic downturn.

It’s all but certain that the Fed will hold rates at 0.75% at this Wednesday’s FOMC meeting. The CBOE’s Fedwatch Tool currently has a ‘hold’ priced in at 95.2%. While PCE fell in line with estimates, the more daunting news is that personal spending is now stagnant for the second month in a row. With no change in spending, true consumer sentiment remains unclear. The trend remains that strong soft data leads markets astray while hard data tells an alternate story. Consumer confidence, in particular, has been an unreliable indicator as to what consumers are doing (or not doing) with their money. One would think strong sentiment would translate into a pick up in spennding. As we look ahead, the Fed and traders alike can only hope for signs of inflation.

Below is a list of economic releases that has driven the US Dollar lower:

- USD Personal Income (MAR): 0.2% actual versus 0.3% previous

-USD Personal Spending (MAR): 0.0% actual same as previous

- USD Real Personal Spending (MAR): 0.3% actual versus -0.1% previous

- USD PCE Deflator (MoM) (MAR): -0.2% actual versus -0.2% previous

- USD Personal Consumption Expenditure Deflator (YoY): 1.8% actual versus 2.1% previous

- USD Personal Consumption Expenditure Core (MoM): -0.1% actual versus 0.2% previous

- USD Personal Consumption Expenditure Core (YoY): 1.6% actual versus 1.8% previous

Chart 1: US Dollar Index 15-minute Chart (May 1, 2017 Intraday)

Immediately following the data, the US Dollar Index fell sharply. The US Dollar found intraday support at 98.90 before rallying above the pre-PCE level of 99.01. At the time this report was written, the index traded at 99.00.

--- Written by Dylan Jusino, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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