US inflation likely to accelerate higher over next year

US personal income grew 0.4% in March, above consensus expectation of 0.3% growth. Meanwhile, real disposable personal income grew strongly by 0.3%. Meanwhile, headline and core prices were up 0.1% m/m. Hence, both headline and core inflation slowed in March, deceleration to 0.8% and 1.6% respectively.

In nominal terms, personal spending grew 0.1%, as compared with projections of 0.2% growth. Meanwhile, spending in real terms was flat, up 0.05%, slowing from an upwardly revised 0.3% growth in February. Real spending on non-durables rose 0.7%, but it was offset by a drop in both services (0.1%) and durable goods (0.3%). Meanwhile, personal saving rate grew 0.3 percentage points to 5.4% in March.

The slowdown in personal spending is a major obstacle for Q2 to witness acceleration in overall economic growth, according to TD Economics. However, there are fundamentals to support it. Real disposable income growth is strong, quickening to 3.1% y/y in March. Household spending might grow higher, noted TD Economics. Given that auto sales are near a cyclical peak, service sector is likely to be the main spending drivers.

Meanwhile, the country’s core inflation was better than expected through Q1, however, this was because of upward revisions to price growth in the initial months of 2016, said TD Economics. But inflation is still expected to accelerate higher over the next year. With the 70% increase in oil price and 5% decline in US dollar signifies that both these factors will become tailwinds, added TD Economics.

“Alongside continued progress in the labor market, this is likely to push trend inflation toward the Fed's 2.0% target”, said TD Economics.