World Trade Growth Expected To Decline From 4.9% To 3.7%

The Personal Income and Outlays report is widely followed because it provides information on the two most important factors in macroeconomics: inflation and consumer spending. Even though it is delayed, the Fed watches this inflation reading the closest, thus making it very important. Month over month August PCE inflation was only up 0.1% which missed expectations for 0.2% growth. It was up 2.2% year over year which also missed expectations by 0.1%. This follows along with the CPI and PPI misses from August. Inflation decelerated even though wage growth hit a cycle high. Core PCE inflation was a flat month over month which missed estimates by 0.1% and up 2% year over year which met estimates.

As you can see from the hedgopia chart below, even though August had the easiest inflation comparison of the year, core inflation only managed to meet the Fed’s target. 

Source: Hedgopia

From July 2017 to August 2017, core inflation fell 9 basis points, but from July 2018 to August 2018, inflation fell 6 basis points. Despite easier comparisons, inflation decelerated.

4 Drivers Of Inflation

It’s important to follow the 4 drivers of year over year inflation in the intermediate term. They are the year over year comparisons, the labor market, oil prices, and tariffs. The year over year comparisons will get tougher in the rest of the year and early 2019. You can see in the chart that inflation has rarely stayed high because comparisons get tough.

Hourly wage growth hit a cycle high in August, but inflation is still below the cycle peak in 2012 when the labor market had much more slack. However, wage growth is only going to get stronger in 2019 as the slack diminishes. In the PCE report, wages were up 0.5% month over month.

Oil prices only affect headline inflation and not core inflation. Because oil prices are so volatile they can have an outsized effect on headline inflation. The recent drivers of oil prices are OPEC refusing to increase production and the American sanctions on Iran which could cut 1.7 million barrels of production per day.