Inflation Measure Favored by the Fed Cooled in August The New York Times

Odds for a December increase fell to about 31%, compared to more than 42% a week ago. However, market-based probabilities for future rate hikes dimmed following the report. The Fed targets inflation at 2% as indicative of a healthy growth rate for the economy. Still, the threats to a so-called “soft landing” — in which inflation would fall back to the Fed’s 2% target without a deep recession — have been growing in recent weeks. Congress is on track to shut down parts of the government by this weekend because a group of hard-right House Republicans have blocked a spending agreement.

Other measures of inflation tracked by economists include the Producer Price Index (PPI) and the Gross Domestic Product (GDP) Price Index. The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term. Retail sales figures and company earnings calls have suggested that American consumers are managing to keep spending despite higher borrowing costs, which have made it more expensive to make big purchases on borrowed money. “I don’t think they’re fully confident yet that core inflation has sustainably slowed; this is adding another building block on gaining that confidence,” said Omair Sharif, founder of the research firm Inflation Insights. At the same time, supply chain disruptions that led to shortages and starkly pushed up prices starting in 2021 have gradually cleared up, allowing costs for many goods to stop rising or even come down slightly.

Consumer price index (CPI)

The report also includes the latest calculation for the Personal Consumption Expenditures Price Index (PCEPI), which measures price changes and provides a view of inflation. Personal consumption expenditures (PCE), also known as consumer spending, is a measure of the spending on goods and services by people of the United States. According to the Bureau of Economic Analysis (BEA), a U.S. government agency, PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP). Growth prospects for this quarter were boosted by other data from the Commerce Department on Friday showing the goods trade deficit narrowed 7.3% to $84.3 billion in August, with exports rising and imports declining.

CPI and the PCE index both measure U.S. inflation in similar but ultimately different ways.

• It gives companies insight into their business needs concerning products and services and can affect hiring and investing.
• Fed rate hike, PCE inflation, Q2 GDP, and mega-cap tech earnings in focus this week.
• The next Personal Income and Outlays report is expected to be released on Oct. 27.
• The CPI formula is more likely to be affected by categories with wide price swings such as computers and gasoline.

Investing.com — Oil prices dropped on Monday, paring back earlier gains, as optimism over the debt ceiling agreement was tempered by renewed expectations that the Federal Reserve will carry on with… “I don’t think equity day trading this takes another rate hike off the table just yet; I don’t think they’re fully confident yet, and I don’t think they should be,” he said. Jeanna Smialek covers economics and reported this article from Washington.

PCE Price Index vs. CPI

Like most price indexes, the PCEPI must incorporate a deflator (the PCE deflator) and real values to determine the amount of periodic price change. Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy. When you measure these price changes across an entire economy, that’s the rate of inflation. But after stripping out food and fuel costs, both of which are volatile, a “core” inflation measure that Fed officials watch closely is beginning to cool notably.

Insights from August’s CPI Report

The battle against inflation is, however, far from being won as the report from the Commerce Department on Friday showed overall prices were still elevated, partly due to higher gasoline prices. Stocks finished the week higher following the CPI report, which showed softer than expected core CPI. Again, as I have noted a few times, the stock market inflation fantasy will get harder from here…. The PCE data for June 2023 showed an increase in personal consumption expenditures to $18.4 trillion; a 0.5% increase. That number contributed to an overall PCE Price Index growth of 0.2%.

U.S. Core PCE Price Index MoM

The next Personal Income and Outlays report is expected to be released on Oct. 27. Core PCE is the Federal Reserve’s preferred measure of inflation. Increases in both PCE and core PCE can signal an increase in inflation; decreases may signal a decline in inflation. These results could also indicate that inflation is still growing, but at a cooler pace. Personal consumption expenditures, or PCE, allows economists, consumers, and businesses to see how well the economy is faring from month to month. PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA.

In addition, our Inflation 101 section provides explanations of many related concepts, such as aggregate and underlying inflation. It measures how consumers spend their money and whether they save rather than spend. It also shows how people change their buying habits when prices change. This provides a window into demand for products and services which can help governments and businesses make decisions.

Examples of services are legal advice, house cleaning, and plumbing. With less than a week before a major interest rate decision by the Federal Reserve Federal Open Market Committee, the key architect in shaping the central bank’s policy to fight inflation was… The PCE price index looks at U.S. inflation by measuring bull markets changes in the cost of living for households. It tracks the prices of a basket of goods and services, each with different weightings, to reflect how much a typical household spends every month. Historically, it has been difficult for the Fed to wrestle inflation lower without causing a big economic pullback.

Taken together, the differences in the two indexes result in CPI inflation readings that are generally higher than PCE inflation readings as shown in the chart for the 1995–2016 period. The personal consumption expenditures price index excluding food and energy increased 0.1% for the month, lower than the expected 0.2% gain from the Dow Jones consensus of economists, the Commerce Department reported Friday. On a 12-month basis, the annual increase for core PCE was 3.9%, matching the forecast. Excluding volatile food and energy prices, though, “core” inflation rose by the smallest amount in nearly three years, evidence that inflation pressures continue to ease. Fed officials pay particular attention to core prices, which are considered a better gauge of where inflation might be headed.

Core Inflation vs. Headline Inflation

The PCE price index counts health care services paid for by employer-sponsored health insurance, Medicare, and Medicaid. The CPI only counts medical services paid for directly by consumers. trade silver Since the GDP report is quarterly and the PCE price index is estimated monthly, the BEA must estimate even further to fill in the gap, so it uses the monthly retail sales report.

Inflation, still a ways off from the Fed’s 2% target, is barely budging as one economist sees a ‘golden path’ developing

However, core PCE and CPI are similar, and both help to determine how much inflation is in the economy. The above table illustrates two commonly discussed important differences between the PCE deflator and CPI-U. The first is the relative importance of housing, which is due in part to the difference in scope mentioned above. CPI contains a large component of owner-equivalent rent, which by definition is an imputed value and not a real direct expenditure. This again stems from the definition of the index and the surveys used.

That partly reflected higher sales at services stations because of rising gasoline prices. Spending was also lifted by increased outlays on housing and utilities as well as transportation, hospitals and outpatient services. Also, oil and gas are commodities and are traded on exchanges where traders can buy and sell them.