US PCE core Deflator (Apr) – 26/05 – with this weeks Fed minutes expected to cast further light on the recent deliberations over the last increase in interest rates the latest core PCE and deflator numbers will determine how much of the recent slowing in headline inflation is starting to feed into core prices.
In the March numbers we saw PCE core deflator remain sticky at 4.6%, slipping only modestly from 4.7%. PCE Deflator has been slightly less rigid, slipping from 5% to 4.2%, however the latest US Q1 GDP numbers showed that quarterly prices were still rising, so while single month numbers are encouraging prices are still higher than they were 3-months ago. Nonetheless, evidence that prices have peaked in the short term is still encouraging in terms of reflecting an expectation that rates probably won't go much higher. The last 5-months has seen US PCE core deflator remain steady around at between 4.6% and 4.7%, having fallen from 5% in October. We now want to start seeing evidence of further weakness as we look to head back towards 4%
On the plus side personal consumption rebounded strongly from 1% in Q4, to 3.7%, as US consumers went out on a New Year splurge. Slightly more concerning was rise in core PCE over the quarter, from 4.4% in Q4 to 4.9%. We're not expecting to see much of a change in this week's revisions, although most of the attention will be on the core PCE number for evidence of any downward revisions, as more data gets added to the wider numbers.
All across the board manufacturing PMI's have got progressively weaker, or has struggled with prices also falling back, while employment measures have been stagnating. Compare that to services sector activity which has been improving and has continued to do so into Q2 as falling energy prices help to free up disposable income and thus prompt a bit of a consumer rebound. The bigger question comes about how long this trend can continue, as we head into Q2, and although pricing pressures have been slowing, prices have still been rising, notably when it comes to wages. In Germany services activity rose to a one year high in April, as did France, while manufacturing slipped further into contraction. UK numbers exhibited similar traits, with strong services, and weak manufacturing. Will this continue in May, or are we at risk of a pullback when it comes to services?
