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Fed's Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?

Year-over-year PCE is up 4.0%. That's the Fed's preferred measure of inflation.
Author:
CS National, Top 10, CPI, PCE 2021-06

Chart Notes

  • National and 10-City are Case-Shiller home price indexes.
  • Prior to 1999, all the measures of inflation were approximately the same. 
  • OER stands for Owners' Equivalent Rent. It is the purported measure that one would pay in rent, if one rented one's own house from oneself.  
  • OER is the single largest item in the CPI with a weight of 24.071%
  • PCE stands for Personal Consumption Expenditures. It is the Fed's preferred measure of inflation and consistently lags other measures.
  • The PCE trend is amazingly consistent.

Chart Q&A

Paul Krugman 2002: "Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Personal Income

On Friday, the BEA released its Personal Income and Outlays report for June 2021 including an Annual Update.

Key Items

  1. Personal income increased $26.1 billion (0.1 percent) in June.
  2. Disposable personal income (DPI) decreased $2.6 billion (less than 0.1 percent)
  3. Personal consumption expenditures(PCE) increased $155.4 billion (1.0 percent).
  4. Real DPI decreased 0.5 percent in June and Real PCE increased 0.5 percent
  5. The PCE price index increased 0.5 percent.
  6. Excluding food and energy, the PCE price index increased 0.4 percent

I discussed points 1-3 in The Impact on Spending of Three Rounds of Free Money is Waning

This post discusses price indexes and purported inflation. 

Year-Over Year PCE

  • The BEA says year-over-year PCE is 4.0%, the same year-over-year increase as in May.
  • Excluding food-and energy PCE is up 3.5% from a year ago. In May, PCE excluding food and energy was up 3.4%

CPI, PCE, CSAI Percent Change From a Year Ago

CPI, PCE, CSAI Percent Change 2021-06

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Chart Notes

  • Year-Over-Year the CPI is up 5.39%
  • Year-Over-Year the PCE price index is up only 3.99%
  • The CSAI percentages are measures of inflation obtained by substituting year-over-year percentage increases in Case-Shiller measures for OER in the CPI.
  • The CSAI National calculation is up 7.79%.

Economic illiterates (most economists and the brainwashed public) do not count housing price increases as a measure of inflation on the basis that housing is a capital expense. 

So what?

Arguably, the CPI is a measure of "consumer inflation". OK but it is a very poor measure of "inflation" and that is what matters historically. 

PCE is even worse.

Mish's Observations On PCE

  • "The Fed's preferred measure of inflation is nearly as consistent as the returns of Bernie Madoff."
  • "Excluding everything that matters, prices are falling.TM"

Not Inflation!?

For further discussion of the silliness of using the CPI as a measure of inflation, please see Home Prices Rise Another 1.7% in May But Economists Say It's "Not Inflation"

Yet, in spite of excluding home prices as a measure of inflation, the Fed Says Inflation Might be Higher and More Persistent Than They Expect.

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