US Core PCE Preview: Forecasts from six major banks, acceleration in inflation

Energy prices will lift the headline rate and we are not as optimistic that core inflation will rise just 0.2% MoM or 3.7% YoY as the market expects. We fear slight upside risks, and this combination of elevated inflation and strong growth could be the catalyst for the 10Y Treasury yield to clearly break above 5%.

Core PCE inflation accelerated in September to its fastest MoM pace since May at 0.24% MoM, though that'd be still below the core CPI's 0.32% gain. We also look for the headline PCE to advance 0.30% MoM. We also look the PCE's supercore measure to jump to 0.4% MoM.

The annual core PCE deflator may have progressed 0.2% MoM in September, a result which should translate into a two-tick decline of the 12-month rate to 3.7%. Although still high, this would still be the lowest rate observed in 28 months.

The PCE deflators are taken from the CPI that was reported up 0.4% for the headline and 0.3% for the core pace. We project a slightly less robust PCE headline increase since the rent component that was up significantly in the CPI has less relative weighting in the PCE deflator. The projection, however, is razor thin, with a rounding down to 0.3%. 

Factoring in our expectation for the headline and core PCE deflators to increase 0.3% during the month, real consumer spending likely rose around 0.2%. 

Core PCE inflation should rise 0.28% MoM and 3.7% YoY in September based on elements of CPI and PPI. Shelter prices should pick up, consistent with the surprising reacceleration in owners’ equivalent rent in CPI, although these prices receive half the weight in PCE as in CPI. Medical services prices should rise by more than in August, but still a somewhat modest ~0.2% MoM. With medical services prices receiving a much larger weight in PCE than CPI, this is the key difference leading to softer 0.28% core PCE compared to 0.32% core CPI. Other elements of PCE should be similar to CPI, although with a stronger increase in airfares, which rose by around 2% in PPI data but a modest 0.3% in CPI. Another large decline in used car prices in September will also weigh on core PCE somewhat less than in CPI. Headline PCE inflation should similarly rise 0.3% MoM and moderate only slightly to 3.4% YoY.