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US PCE Income and Inflation Measures Jump in January

by Adam Corbett | February 26, 2021

Adding to the top-of-mind inflation story this morning is an increase in the Federal Reserve’s preferred measure of inflation, the US core Personal Consumption Expenditure price index. Released by the Bureau of Economic Analysis this morning, January’s Core PCE Price index earlier which registered a 0.3% increase month-over-month.

Surveyed economists were expecting only a modest uptick of 0.1%.

In overnight trading, we witnessed the dollar attempt to reclaim a 1.27 handle against the Canadian dollar, but as we go to print, the mighty greenback has backed off session highs to trade in the mid-1.2600s despite the back of the stronger-than-expected inflation data. It remains about 0.3% higher against the loonie on the session, and is up about 0.45% on a trade-weighted basis.

On a related note, and stealing the limelight somewhat this morning, is the notable increase to consumer’s income, jumping 10% for the month, a substantial beat to economists’ expectations of a 9.5% increase.

With a fresh round of $600 stimulus checks, it should come as no surprise that consumers were able to consume more on the backs of this additional spending power.

Within the goods segment, consumption increases were widespread, led by recreational goods and vehicles. Increases in food and beverage consumption were also notable drivers of the increase. This aligns with what we saw in the services sector, as spending on food services and accommodations contributed its fair share of the increase.

Despite consumption jumping for the month, on an annualized basis, the increase represents a growth rate of 1.5%, directly in-line with market expectations and potentially putting a lid on ‘rampant inflation’ concerns.

Of the three main consumer price inflation gauges, the Fed favors the PCE index. Its impact on markets, however, tends to be rather muted as its CPI counterpart is released approximately 10 days earlier and tends to snag headlines.

With today’s release, the inflation story comes full circle. We’re seeing a large rise in income and a smaller increase in consumption, which is driving up the savings rate for US households.

These cash reserves are the culprit to fueling the inflation fears being priced into bond yields, because as at some point, consumers will be confident enough to spend the slush funds they have squirreled away.

The question to be pondered is to what extent will the Fed take a back seat and let markets sort themselves out?

 

Adam Corbett
Business Development Manager, Canada & Currency Analyst
acorbett@cambridgefx.com

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