The headline from yesterday’s GDP data was that growth slowed and inflation accelerated in Q1:24. The inflation part was confirmed by today’s Personal Consumption data. That’s not a good look for markets, and seriously inconvenient for the Fed.
Headlines are often misleading, but after the last two days there are plenty of pundits shouting that inflation is back on a rising trend and as a result that the Fed will have no room to cut rates this year, and might even have to start raising them again.
Looking a little below the surface leads us to three conclusions.
Headline GDP growth is likely to be a bit stronger than Q1 in the 2nd quarter; inventories and imports dragged the headline down in Q1 and will probably boost the headline next quarter. Underlying GDP growth is probably nearer 2.5% pa.
Both core PCE inflation and core services inflation are likely to be lower in Q2 than in the last quarter; we think there's a high probability that shelter, car insurance, medical services and financial services inflation will be slower in Q2.
Real disposable income stagnated in Q1, has grown by 1% per annum over the past 9 months and is unlikely to pick up much in Q2. It’s unlikely that personal consumption will accelerate from here: we expect it to run a little cooler in Q2.
Memes get traction whether or not they are ‘true”. The inflation is reaccelerating story is inconvenient to say the least for those on the FOMC who would like to start cutting rates. It will probably take at least 2 back to back low prints for core inflation to resurrect hope for near-term cuts. In the meantime, for partly technical reasons, longer-dated bond yields are trending higher again.
More detail in the charts. In terms of numbers they show:
Core PCE Less Housing 6m AR: 1.8% (Up from 0.8% in December). PMI output prices composite nudged down from 54.6 to 54.4 in April.but clearly higher than 4 months ago.
Core Services less Housing PCE, 6m change: 3.8% from 4% in previous month. Services PMI Output Prices: 54, down from 56.4
Core Services less Housing PCE, momentum: 5.1%, up from 2.6% in December and 4% last month. Average Hourly Earnings momentum: 4.3% in March, down from 7.6% in November 2021.
Goods spending now growing slightly slower than trend, although at a higher level.
Services spending growing above trend for the last 4 or 5 months.
