PCE, the Fed’s preferred measure of inflation remains 2.5 percent from a year ago. Expect significant improvements across the board in August and September.
Chart Notes
- CPI is the consumer price index. Monthly reports are from the Bureau of Labor Statistics (BLS), the same organization that posts the monthly jobs reports.
- PCE is the Personal Consumption Expenditures price index not to be confused with PCE spending. The latter is in dollars. PCE reports are from the Bureau of Economic Analysis (BEA), the same organization that posts the quarterly GDP reports.
CPI Measurements
The CPI measures prices of items directly paid by consumers. Shelter has the biggest weight at 36.315 percent of the entire index.
Home prices are not in the CPI, just rent and Owners’ Equivalent Rent (OER). OER is the price a homeowner would pay to rent if they rented instead of owned.
PCE Measurements
The PCE contains items directly paid by consumers but also expenses paid on behalf of consumers. Medical care is the best example. The PCE measures prices of individual policies as well as corporate health policies and Medicare.
CPI vs PCE
Neither measures home prices directly. Both measures are flawed. Inflation matters, not just consumer inflation. The Fed has not figured this out.
As a result of the difference in measurements and weights, Rent has a bigger impact on the CPI compared to PCE, and PCE overweighs health care vs the CPI.
The biggest factor in estimating year-over-year changes is what happened to the month-over-month change a year ago.
Investopedia notes “Prior PCE figures are subject to revision every year. That can result in different measurements over extended periods. Some observers feel that this reflects the inability to value personal consumption expenditures accurately.”
Expected Results
The Bloomberg consensus was correct across the board.
I expected the PCE price index would rise 0.1 percent not 0.2 percent.
Calculated to two decimal places, the increase was 0.16 percent. Another 0.02 percentage points would have done it.
For discussion, please see Expect Favorable CPI and PCE Inflation Reports for Two More Months
I am much more confident of year-over-year declines in both PCE and CPI indexes for August and September.
I will revisit more precise estimates later, but I expect at least a 0.2 percentage point improvement in all of the numbers in my lead chart.
Addendum
One of my readers commented that 2.5 percent is 25 percent above the Fed’s 2.0 percent target.
I replied “You might think so and I might think so. In fact, I think 0.0 is the definition of stability. But our opinions don’t count.”
Doesn’t matter anyway. The numbers are garbage to begin with. They aren’t measuring real world inflation, just the change in the index value constructed by gov’t hacks. Alas, it’s what we have to work with.
Two economies…
If the Fed loosens… that benefits those experiencing the prosperous side of the economy… and crushing those who are already gasping for air….
Should be interesting
HEADLINE IS WRONG. PCE INDES Level is up 2.5% year over year. The PCE inflation rate (2.5%) is what is unchanged year over year … but that’s not what the headline means when taken as-written.
Re headline “The Year-Over-Year PCE Price Index Unchanged in July”:
The phrase “year over year PCE price index” is not grammatically correct. I initially and not-unreasonably read the headline as saying the PCE Price Index for July was the same as for a year ago, but that wasn’t what you meant since the PCE price index is actually up 2.5% year over year.
I think a more correct headline would be “Annual PCE Price Inflation Rate Stuck at 2.5% in July”. This is also shorter than the current headline. If you want something closer to the original headline, how about “Year-Over-Year PCE Price Inflation Rate Still 2.5% in July”
I advise against “Year-Over-Year Change in PCE Price Index is Unchanged in July”,
since trying to explain to someone that the something’s rate of change is itself not changing is asking for trouble, unless the person enjoys thinking in Calculus-level concepts
Given the huge disconnect between economists and normal people about “inflation”, “disinflation”, “deflation” etc., I think it’d be helpful to “raise the bar” here.
The PCE price index HAS changed, it is higher than laser year, but the change of that index (the inflation rate) is better described as “steady” (or “continuing”), not “unchanged”.
Another alternative would be “Inflation continues unabated, with PCE price measures up 2.5% year over year”.
The economy is fine. Those who disagree need to be sent to re-education camps.
“Stable Prices” are mandated by 12 USC 225a of 1977. (Reserve Act of 1977).
In addition, the Statutory target is 0.0%.
2% is a pulled out of thin air number that has rarely been met, certainly not a real target, and the law mandating 0.0 has never been enforced.
“…the little people who had small savings were wiped out. But the big factories and banking houses and multi-millionaires didn’t seem to be affected at all. They went right on piling up their millions. Those big holdings were protected somehow from loss…”
Phyllis Knight, A Very Ordinary Life
Retail Therapy (Shop till your fingers hurt) (Personal Consumption Expenditures)
isn’t going to stop or drop. The sugar daddies at the FED and Federal government will see to that. This lower PCE measure (0.5 MoM) is just waiting for new money creation (M2) to occur.
Fully expect the GDI and GDP to diverge even more.
That is called something for nothing where I come from.
The opinion that counts often depends on the waste outlet issuing the opinion while not getting hung up on the tail. .
“I think 0.0 is the definition of stability. But our opinions don’t count.”
I’d go for change in wages minus change in productivity. If productivity goes up more than wages we should see deflation.
Change in something practically immeasurable, denominated in some completely arbitrarily modified-on-some-imbecile’s-whim unit of “measure.” Minus change in something completely made up, and 100% nonsensical…..
Now ain’t we, like, being all, like, scientifimecally and,like, stuff!!!! All “we” need now, is some acronym, like the TXJ; and we’re like, you know, Krugman and, like, Wall Street and, like, stuff!!
re: “Expect significant improvements across the board in August and September.”
That corresponds to money flows, the volume and velocity of money. July was an inflection point.
The US Golden Age in Inflation was driven by 2/3 velocity, by putting savings back to work (George Bailey’s It’s a Wonderful Life). Today’s economy is propagated by primarily new money (the money supply hit all-time highs during Nov. 2020). Thus, housing prices have appreciated >50 percent during C-19. Inflation is the most destructive force that capitalism encounters.
Fed’s cutting, sky’s the limit, hot diggity dog, leverage up, buy AI the silicon messiah, we are all saved, progress never turns back, just like stonk prices!
Jean Claude Trichet (remember that guy?) : Zee stabilite!
But in a moment of doubt, I wonder if the BLS used CCP statisticians for these numbers in lieu of multi Z score misses, a happy consensus. Maybe not since the root of “happy” is the nordic / germanic “hap” which means chance. Nothing seems to be left to chance in this print.
It is still inflation. Compounding. I guess that’s not recession. It looks more like depression to me out there.
2.5 is 25 percent higher than target. Not close
You might think so and I might think so. In fact, I think 0.0 is the definition of stability.
But our opinions don’t count.
I’m on board zero. It’s a shame it’s not an option
Correct. “Our opinions don’t count.”
What counts is how we all take advantage of these things we have “no-say” in.
“I think 0.0 is the definition of stability.”
Stability of what?
The arbitrarily aggregated “price” of some nonsensical “basket” of pure arbitrariness? Pulled out of some gaggle of illiterate dupes’ rear?
The only economically meaningful measure of monetary “inflation”, is just that: The measure of how much the money supply is inflated. Whether China has a fire sale on cell phones every month, has no relevance whatsoever. And exactly how much arbitrary “weight” some imbecility practitioners arbitrarily “assigns” to that sale every month, even less so.
Now that it has been demonstrated, ad nauseum, well beyond any and all reasonable doubt, that The Fed WILL, no questions asked, bail out ALL credit in order to keep it’s clientele of privileged imbeciles flush; at everybody elses expense; no matter what: The purchasing power-, hence economically-, -relevant money supply; right up to the point where the entire “system” completely collapses, can only be total outstanding credit. Ergo: The only meaningful “inflation” measure, is delta outstanding credit. Arbitrary prices of cell phones and tennis socks during a sale at Walmart in the Wisconsin ares, means nothing at all. Just delta outstanding credit. That IS Inflation.
Things used to be less clear during the 20th century, which is when most of the “Greats” of economics were studying it and rote about it: When central banks would step in with “reserve requirements” and activist short rate control some but not other times, the difference between “hard”, “high power” money and various classes of deposits and credits, become a complex jungle. But now that anyone with a C-level make-work “job” on Fed Street has complete discretion to create as much purchasing power as he very well fancies for himself; and have all of that automatically come under the “full faith and credit” umbrella of US taxpayers (and others that US guns can be pointed at…); it’s easy: ALL outstanding credit. Since ALL of it will be bailed out; no matter what; ALL of it is just as “high powered” and “cold, hard” as cash.
Hence, again: Delta outstanding credit. All of it. That IS inflation. Changes in cellphone prices or what “weight” some clueless lightweight feels like assigning to it, matters not one iota.
Blah, blah, blah. So what? Tell me how you are taking advantage of it. Then I will think you are clever. Until then, you are just another dumb f*ck who blathers on forever, saying close to nothing in as many words as possible. Useless.
every human being in history of humans spend their lives trying to take advantage of their situation in life. why do you put down people for thinking. it seems pathetic. and a cry for help. i do enjoy your analysis on some mundane topics like energy. so keep those coming old sport.
“ every human being in history of humans spend their lives trying to take advantage of their situation in life.”
If only that were true. But it isn’t. Far too many people are lazy.
CORRECT. one needs to just calculate mouse click currency and debt creation. that is inflation. end of story. the cpi and pce etc…….are all rubbish for middlebrows to be distracted.
“one needs to just calculate mouse click currency and debt creation. that is inflation.”
As long as all debt is ultimately; should all other gyrations fail; reliably bailed out / backstopped / monetized with currency, then yes: it simply cannot be anything else.
When The Fed flat out guarantees that even the most obviously never-payable junk debt (the US federal $35trillion one among them…), even debt extended by pure rackets not in observance of any nominal “reserve requirements” will never be defaulted on; by way of printing up whatever number of dollars, without limit, required to ensure just that; it no longer matters one iota whether what you hold in your hand is a dollar bill, or a mere promise of one, made by some senile guy in Zimbabwe or Washington or New York. Both are fully equal, as far as purchasing power, hence economically relevant money supply, hence inflation, is concerned.