Personal income rose 0.2% in August, in line with expectations, but from a downwardly revised 0.3% increase in July. Controlling for inflation and taxes, real disposable personal income edged down 0.1% in the month.

Personal consumption rose by 0.1% in nominal terms (in line with the consensus). In real terms spending fell 0.1%. By component, real spending on durable goods saw the biggest decline, falling 1.0%. Nondurable goods also fell 0.2%, while services edged up 0.1%.

The PCE price deflator rose 0.2% month-on-month (below consensus for 0.3%), while the core PCE deflator ticked up just 0.1%. Year-on-year, PCE inflation was up 1.4%, while the core rate decelerated to 1.3%.

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Key Implications

The consumer appears to have lost some momentum after a strong second quarter. However, we have to take this report with a grain of salt given the distortionary impact of Hurricane Harvey. The negative impact could continue through September, before spending gets a lift as rebuilding begins. So, it will be a few months before we get a clear read on the state of household spending.

Having said that the broader outlook for U.S. consumers remains positive. With few signs of a slowdown in the pace of job growth and increasing evidence of accelerating wage growth, household spending should continue to support demand growth.

The continued deceleration in inflation (as measured by the price deflator for personal consumption) is notable. Core pries in particular did not show any of the acceleration recorded in the CPI measure in August. While Chair Yellen noted this week that the Fed does not have to see inflation reach 2.0% before raising interest rates, she was also at a loss to fully explain its recent weakness. Signs that inflation is deteriorating further casts some doubt on the Fed’s plans for a December hike.


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