U.S. consumer spending comes in strong in September, core inflation remains soft

The U.S. personal income report showed robust income and spending growth in the month of September, consistent with expectations. Personal income rose 0.4 percent sequentially, with both compensation and wages and salaries rising at the same rate. Nominal personal spending was up 1 percent sequentially, while real personal spending rose 0.6 percent sequentially.

The strength in real spending was greatly driven by strong vehicle sales data for September. Moreover, the BEA stated that the reports for August and September included the impact of Hurricanes Harvey and Irma. According to a Barclays’ research report, personal spending is expected to be strong in the fourth quarter of 2017, in line with solid employment, personal income and consumer sentiment data. But the continued drawdown in the savings rate is expected to restrict how much further consumption can accelerate.

The savings rate dropped from 3.6 percent in August to 3.1 percent in September, the lowest reading since December 2007 and it has been trending lower since February, when it was 4.1 percent. The decline shows households reducing savings to underpin the solid rise in consumption in the third quarter, particularly for durable goods, stated Barclays. Income growth has picked up recently on strong employment growth and hours worked, implying that the savings rate could modestly rise in the months ahead.

The headline inflation came in strong; however, core inflation softened. Headline PCE rose 0.4 percent sequentially, coming in line with consensus expectations, while core PCE rose 0.1 percent, also in line with consensus expectations. The year-on-year headline PCE rate remained same at 1.6 percent, while the core rate also stayed unchanged at 1.3 percent.

Food prices came in flat sequentially, while energy prices were up 6.8 percent after the spike in pump prices due to the hurricanes. Services price pressures are expected to continue strengthening in the coming quarters, pulling inflation gradually higher.

“Nevertheless, y/y changes in PCE inflation are likely to remain subdued through Q1 18 as the negative base effects from weak prints earlier in the year across various categories continue”, added Barclays.

At 15:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 52.0059. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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