TD Securities economists Eli Nir and Oscar Munoz have increased their August core Personal Consumption Expenditures (PCE) forecast following stronger PCE-relevant components in the August Producer Price Index (PPI) report. The new projections are for core PCE at 0.24% month-over-month (m/m) and 3.3% year-over-year (y/y), while headline PCE is expected at 0.33% m/m and 3.8% y/y [1]. The economists attribute this adjustment to changes in the Bureau of Economic Analysis (BEA) methodology, which are anticipated to result in downward revisions to year-on-year inflation but slightly stronger near-term monthly profiles [1].
TD Securities also provides a market-based core PCE forecast of 0.18% m/m, which would represent a slight increase from July [1]. The economists emphasize that their PCE forecast, as well as the Federal Reserve's September decision, depends on the outcome of the upcoming Consumer Price Index (CPI) report [1].
Additionally, TD Securities notes that portfolio management is no longer derived from PPI, and there remains uncertainty regarding the BEA's new calculations for this component. They expect it will likely be revised lower, but caution that the market may be overstating the magnitude of potential negative revisions [1].
Overall, TD Securities expects a downward revision to year-over-year inflation figures, while near-term month-over-month profiles are likely to see more positive revisions [1].
CONCLUSION
TD Securities' revised August PCE forecasts reflect stronger PPI components and methodological changes at the BEA, suggesting a nuanced inflation outlook. While year-over-year inflation may be revised downward, near-term monthly figures could be stronger. The market's reaction will hinge on the upcoming CPI report, which is central to the Fed's September policy decision.