US: Expect gradual pick-up in core PCE inflation - Nomura

In view of analysts at Nomura, relevant data from the July CPI and PPI report suggest a gradual pick-up in US core PCE inflation in July.

Key Quotes

“Our forecast for July core PCE price inflation is a 0.1% (0.069%) m-o-m increase, equivalent to a 1.4% (1.38%) y-o-y gain. Core CPI inflation rose only 0.1% (0.114%) m-o-m in July. A major surprise was the sharp 4.2% m-o-m drop in lodging-away-from-home prices, which subtracted about 5bp from the m-o-m core PCE inflation rate. Although we expect this downside surprise in lodging-away-from-home prices to be transitory, it adversely affected our July m-o-m core PCE price forecast by about 4bp as hotel and motel prices account for 0.9% of the core PCE price index.”

“Further, portfolio management and investment advice services prices and passenger air transportation prices (both from the PPI report) declined sharply, creating more drag on core PCE inflation. Moreover, a slowdown in rent CPI inflation will likely continue to weigh on core PCE inflation. However, decent increases in hospital prices from the PPI and prescription drug prices from the CPI were positive to core PCE inflation and may have partially offset weakness in other subcomponents of the core PCE index.”

“Among noncore components, we expect aggregate energy PCE prices to fall 0.1% m-om. The prices of various energy commodities in CPI such as motor fuel and piped gas fell in the month, which may likely adversely affect the corresponding subcomponents of the PCE energy index. For food PCE inflation, we expect a steady 0.2% gain based on the CPI food-at-home price index. Altogether, we expect headline PCE index to increase by 0.1% (0.069%) m-o-m, which is equivalent to a 1.38% y-o-y increase.”