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.”