We expect core PCE to hold on to +0.2% MoM gains, which would have the effect of lowering the YoY growth rate by a little over 30 bps (to 3.9%). 

We are also aware that the Fed’s favoured measure of inflation, the core PCE deflator, could come in a little higher than the market is forecasting. The core PCE deflator could come in a little higher than the market is forecasting. We look for a 0.3% MoM increase in prices, similar to the CPI report, whereas the consensus is for a more benign 0.2% MoM print.

We expect core PCE inflation to register a third consecutive 0.2% MoM increase in August; undershooting the core CPI's stronger 0.3% gain. The YoY rate likely also fell to 3.9%, while we expect the key core svcs ex-housing series to slow to 0.2% MoM following July's 0.5% surge.

The annual core PCE deflator may have progressed 0.5% in August, a result which should translate into a three-tick increase of the 12-month rate to 3.9%.

We forecast a more modest decline in US core PCE to 3.9% YoY.

Elements of 0.28% MoM US core CPI in August but some softer details of PPI data lead Citi Research to forecast a more modest 0.14% MoM increase in core PCE inflation. Core services prices ex-housing, which rose a solid 0.37% MoM in CPI, should rise 0.17% MoM in PCE inflation while goods prices should decline modestly as in CPI. Shelter prices should continue to slow over the coming months, but this will have less of a disinflationary impact on PCE inflation than on CPI. Meanwhile, headline PCE inflation should rise 0.4% MoM due to higher energy prices and rebound modestly to 3.4% YoY.

We forecast the PCE deflator increased 0.4% in August, and the core PCE deflator rose 0.2%. This, along with our forecasts for personal income to rise 0.5% and personal spending to rise 0.5% in the month, should bring real disposable income growth back to the black.