The Fed’s Bureau of Economic Analysis released its updated preferred measure of inflation, the Personal consumption expenditures (PCE) price index. The headline number showed a 2.45% change year-over-year and maintained an essentially flat position. The core PCE—which removes the volatile food and energy sectors—declined slightly to 2.8%.
PCE and Core PCE Month-over-Month
The 2.8% core PCE is close to the Fed’s year end expectation of 2.4%. The year-over-year decline is welcome news but when we dig into the numbers there is a worrying trend. On a month-over-month review, both headline and Core PCE have been showing a general upward trend since November of last year.
If we annualize the last three readings of Core PCE, we anticipate a core PCE of 4.0% which is not what the Fed wants. However, a positive development is seen when we review the components of the PCE data.
The Services portion of PCE has declined from recent highs—which is positive. Should the trend continue, it will help push down future inflation numbers.
The recent increase is Non-durable goods—to .7% month-over-month—is not something we would want to see continue indefinitely but given the recent deflation we have seen, the increase is acceptable in the short term.
Personal Income Month-over-Month
The news was mixed on the Personal Income front.
General strength in Personal Spending is positive for economic growth, but with real—inflation adjusted—disposable personal income once more turning negative on a month-over-month basis, future household wealth creation becomes more limited.
PCE Data Recap
The monthly decline in the Services index was the most positive part of this month’s inflation data. We might be seeing the beginning of the “sustainable decline” in inflation that the Fed wants to see to start cutting rates. However, the recent upswing in inflation numbers would imply the Fed will take a more wait-and-see attitude so we’ll need to continue to monitor and see if the decline continues.
The return of Real Disposable Income to negative growth is an area of concern. The current futures market is generally expecting rate cuts to begin in June, but given the data, it should not be considered a foregone conclusion.
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