- U.S. PCE deflator expected to surge
- April U.S. personal income and spending expected to give back much of March’s surge
- U.S. consumer sentiment expected to be revised slightly higher
U.S. PCE deflator expected to surge — The markets are already aware that the CPI and PPI statistics surged in April, but today’s report will show the extent to which the April PCE deflator also surged, which is the Fed’s preferred inflation measure. The CPI on a 3-month annualized basis surged by +7.2% headline and +5.6% core in April.
The consensus is for today’s April PCE deflator to rise by +0.6% m/m and +3.5% y/y, which would be even stronger than March’s report of +0.5% m/m and +2.3% y/y. Meanwhile, the April PCE core deflator is expected to rise +0.6% m/m and +2.9% y/y, stronger than March’s report of +0.4% m/m and +1.8% y/y.
Today’s expected year-on-year figures of +3.5% for the headline deflator and +2.9% for the core deflator would both be well above the Fed’s 2.0% inflation target. However, the strong inflation figures cannot simply be written off to the low year-earlier base caused by last year’s pandemic shutdowns.
In fact, inflation has been running hot in the last several months. On a 3-month annualized basis, the headline PCE deflator during Jan-March rose by +4.3% and the core deflator rose by +2.6%. That shows that the Fed has a bigger inflation problem than just a low year-earlier base.
Even after the recent April CPI report was stronger than expected, however, Fed officials continued to express their view that the current inflation surge is transitory and will fade by next year when the economy falls back to earth. The Fed is viewing the current inflation surge as the result of pent-up demand and supply chain bottlenecks that will eventually fade. The Fed continues to believe that the larger disinflationary trends that have plagued the global economy over the past decade will continue and will cause inflation to return to tepid levels in coming years.
However, there is a risk that the Fed is wrong and that inflation expectations could become unanchored. If that happens, the Fed would be forced to quickly raise interest rates to prevent the bond market from panicking.
The U.S. economy is currently in uncharted territory with both monetary and fiscal policy in extraordinarily stimulative modes at the same time. Moreover, there is no move by the Fed to curb monetary policy despite the current surge in the economy and inflation. Also, fiscal policy will likely get another boost later this year as much of President Biden’s $4 trillion jobs and family plan is likely passed by Congress. The markets in coming weeks and months will therefore remain very nervous about the inflation situation.
April U.S. personal income and spending expected to give back much of March’s surge — Today’s April personal income and spending reports are expected to come back to earth after the surge in March that was caused by the $1400 stimulus checks.
The consensus is for today’s April personal income report to fall by -14.3% m/m, reversing a large chunk of the +21.1% surge seen in March due to the stimulus checks.
Meanwhile, today’s April personal spending report is expected to show an increase of +0.5% m/m, fading after the surge of +4.2% seen in March as consumers spent their stimulus money.
U.S. consumer sentiment expected to be revised slightly higher — The consensus is for today’s final-May University of Michigan U.S. consumer sentiment index to be revised slightly higher by +0.2 points to 83.0, which would leave the index down by -5.3 points from April instead of the preliminary decline of -5.5 points.
U.S. consumer confidence has soared this year as the pandemic fades and after many consumers received two stimulus checks. In addition, many consumers are in good financial shape after having saved a large chunk of money during the pandemic when they couldn’t travel, go to public entertainment events, or go to restaurants. Many consumers are now feeling more confident about resuming normal life since nearly one-half of the U.S. population has received at least one vaccination dose.
However, the University of Michigan’s U.S. consumer sentiment fell in early May fell as some of the shine wore off earlier optimism about the fading pandemic. The pandemic is not yet fully over and many consumers remain cautious. In addition, the labor market still has a long way to go before recovering the rest of the 8 million missing jobs.
Higher gasoline prices are also a negative factor for U.S. consumer sentiment. Regular gasoline prices have risen sharply by +35% this year to a 6-1/2 year high of $3.04 per gallon, according to AAA, as OPEC+ has successfully starved the global economy of oil supply and forced prices higher.
Consumer sentiment is also being hurt by higher prices for a wide range of goods and services due to strong demand and supply chain bottlenecks. Many consumers may feel that the prices of big-ticket items such as cars and homes are rising out of their reach.