US personal consumption expenditure preview

Personal consumption, income data along with PCE price index would be released from the US at 13:30 GMT.

Why it matters?

• Personal consumption and income data provide information on consumer sentiment. Consumers tend to spend more, should they perceive upcoming time to be favorable.
   
• An increase in income also improves sentiment and purchasing power of consumers. Over the last two years or so, the Federal Reserve has repeatedly said that the income growth has been robust.
   
• PCE price index or PCE deflator is Fed’s preferred measure of inflation indicator. So this gauge is of extreme importance as FED will be closely monitoring inflation for subsequent hikes. Fed has indicated that it is likely to hike rates thrice in 2017 of 25 basis points each but the actual numbers of hikes would be a function of actual inflation.
   

Past trends –                      

• PCE price index, largely due to oil price started falling from 1.8 percent y/y in mid-2014 to as low as 0.1 percent y/y in June 2015. It has remained in the low area since. It has somewhat recovered since November. This year in January, it was up 1.3 percent and 1 percent in February. It has hovered around 1 percent since. It began rising since September again, when it rose by 1.2 percent, followed by 1.4 percent in October and November. It has grown further in December to 1.6 percent.

• Core PCE price index also slowed down as lower energy prices might be feeding into prices and spending remains subdued. In December, it grew by 1.7 percent y/y.
   
• According to Fed communications, income has been growing at a solid rate. In December it grew by 0.3 percent.
   
• Compared to income, spending has remained subdued. A further growth here is necessary to boost inflation. In December, spending grew by 0.5 percent.

Expectation today –

• Personal income and expenditure, both are expected to grow by 0.3 percent.

Market impact –

The dollar has strengthened since the election of Donald Trump riding the wave of optimism with regard to his looser fiscal policies and in recent times it found another boost as the FOMC officials continue to back a quicker pace of rate increases. The dollar index is currently trading at 101.89, up 0.56 percent for the day.