The first item of news following the Easter holiday was a negative for the US dollar, as personal spending missed expectations while inflation also came in lower than expectations. There was also a substantial negative revision of January’s personal spending growth (adjusted for inflation), to unchanged from an original 0.4% month-on-month growth rate.
Starting with the personal income side, the news appeared encouraging as it posted a 0.2% increase (above expectations) from January, when it had risen by 0.5%. Wages and salaries posted a small contraction of -0.1%, but this was after January’s substantial 0.6% gain.
However, it appears that the income gains were not translating into higher consumption as personal consumption grew at a rather low 0.1% rate month-on-month. January’s number – unadjusted for inflation – was adjusted downwards to 0.1% from 0.5% first reported. Breaking down the personal consumption change, there was persistent weakness in non-durable goods spending, whereas durables spending was down during January and December.
Looking at the inflation numbers as measured by the Personal Consumption Expenditure price index, the headline index dropped marginally by 0.1% month-on-month during February, bringing the annual PCE price index rate to 1%. The core price index, which excludes food and energy, rose by a smaller-than-expected 0.1%, which meant the annual change remained unchanged at 1.7% instead of rising to 1.8% as economists had expected. While the core rate is not far from the 2% Fed target, the Fed can always choose to focus on the headline number (at 1%) as well as point out that the core is not looking likely to break above 2% soon.
Overall the figures showed that consumption might not be as solid heading into the first quarter of the year, in contrast with a strong finish to 2015 according to the GDP numbers that were released on Friday. More importantly perhaps, PCE inflation appeared to be moderating, which confirms the sanguine assessment of the inflation situation made by the Federal Reserve during its latest meeting two weeks ago. In leaving interest rates unchanged, the committee said it expects inflation to head lower in coming months, which was an interesting prediction given that energy prices have rebounded recently.
The dollar lost significant ground following the release of the data, as euro / dollar rose to around 1.12 from 1.1160 before the announcement, while dollar / yen retreated to 113.30 from 113.67. The data confirms that the dollar is trapped in its recent ranges and it looks like neither the data nor the Fed is likely to lead to a breakout of the greenback out of these ranges.
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