PCE and Consumer Buoyancy

By Oliver Rust, Truflation Head of Product

The Fed's long-assumed favorite inflation measurement tool, the PCE, showed a seasonally adjusted 0.2% increase for the month, with a 12-month inflation rate at 2.1% – both in line with estimates.   

This is certainly closer to the Fed 2% annualized inflation target rate. September is down 0.2 percentage points from August (which was 2.3%).  But the core inflation rate which, excludes food and energy, increased 0.3% on a monthly basis to 2.7%. 

This monthly increase in inflation is driven by services prices, which increased 0.3%, while goods prices decreased 0.1%, the fourth outright deflation figure in the past five months for the category.  

The PCE is based on Census Bureau’s retail trade report and includes: prices paid on behalf of consumers, such as Medicare and corporate insurance, and purchases of goods and services by US residents in foreign countries. Beyond the overweighing of health care, this index doesn’t include consumer expenditure and prices of home services. It only includes rent, and then uses rent prices to calculate an owner's equivalent rent. This brings significant bias to the data, and as a result is not measuring true consumer inflation.

The PCE combs just before Fed Decision Day, with markets expecting the Fed to cut its short term borrowing rate this week. Despite policy makers expressing confidence inflation is heading back to target, which is the opposite of what Truflation is showing and has been communicating for the last 8 weeks (a reversal toward upward-driven inflation).

The views of policy makers are no doubt going to be influenced by PCE and the state of the labor market (a general trend of showing companies are continuing to hire and layoffs are low).

Initial filings for unemployment benefits totaled 216,000 recently, which represents a 12,000 decrease from the previous week. In addition to the labor market, the Commerce Department showed income and spending rising during the month ... with personal income increasing 0.3%, slightly higher than the August number, and consumer spending also rising. to 0.5%, beating expectations by 0.1%. 

A further reduction in interest rates will no doubt accelerate inflation, And as consumers feel more buoyant, they'll drive-up demand (which is what Truflation is already seeing).

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