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According to analysts from Wells Fargo, trends in the PCE deflator support the Federal Reserve policy goals this year. They point out that the trend in wage and salary growth firmed in recent months.

Key Quotes:

“Shaking off the soft start to 2018, consumer spending accelerated further in April, increasing 0.6 percent during the month and 0.4 percent adjusted for inflation. Personal spending for March was also revised higher with both nominal and real spending rising 0.5 percent. March’s print had already suggested the tepid spending pace in Q1 was just temporary, and the April report reinforced that consumption growth is accelerating solidly with Q2 poised for a strong rebound.”

“The trend in wage and salary growth has clearly firmed in recent months on continued strong demand in the labor market, which has helped support income gains and consumer confidence. Such confidence supported stronger spending on future income gains in recent months, and the savings rate has declined to 2.8 percent from 3.0 percent in March. Tax cuts may have also supported the surge in recent spending, as larger paychecks continue boost disposable income.”

“Trends in the PCE deflator support the Fed’s policy goals this year. The headline PCE deflator has risen at a 2.1 percent pace over the past three months and will likely accelerate slightly in May on higher energy prices. Core PCE inflation is rising at a stronger 2.3 percent annualized pace over the past three months. That both figures are increasing at a stronger than-2 percent pace clears the way for a June increase in the funds rate, though neither PCE nor CPI inflation suggest price growth warrants a more aggressive approach than is currently expected.”

“With inflation firming at a manageable pace, we expect the Fed will find it prudent to increase borrowing costs three more times this year starting with the next meeting in June.”