US: Focus on July PCE deflator figures - Rabobank

Analysts at Rabobank suggest that before we get to the most watched number of the week tomorrow, today first sees the estimate for the July PCE deflator – the FOMC’s preferred measure of inflation in the United States.

Key Quotes

“This measure is not expected to show a meaningful increase in price pressures yet, as the deflator currently hovers around the 1.5% mark. Assuming that today’s reading will confirm a similar level (1.4% is expected), the employment report will be the largest remaining part of the puzzle. If yesterday’s ADP estimate was roughly correct, we should see decent employment gains, and perhaps the more important question is then whether wage developments are finally gaining some traction.”

“For now, it seems like the Fed will still find itself in a difficult position come the September meeting, with one part of their mandate –unemployment– reasonably near their goal, but the other –inflation– still not where it should be. This ‘broken’ relationship between unemployment and price developments means that all Fed models may be off, a concern that was also raised by a few FOMC members in the previous meeting. This puts the Fed in a tough spot in deciding whether it wants to stick to its ‘planned’ hiking cycle. Additional uncertainty surrounding the US government’s debt ceiling and shutdown only muddy the waters more.”