HOW IS THAT GOING? A recent reading of the PCE Deflator inflation measure, the index that the Fed wants to target at two percent, has the key inflation rate at +2.2% as of August. Not bad, but one month is not “…the longer run.” …and besides…for the longer run, the Fed likes to ignore the headline PCE and look to the PCE Core, because they figure this rate is the better indicator for the future path of headline inflation (Graph 3).
The latest reading of the PCE Core is +2.7%. That’s about three percent down from the February 2022 peak. The longer run measures, the 10 Year & 20 Year averages, are at multi-year highs of 2.5% and 2.1% respectively. While these rates are above the target, it took a lot of work to get them even that high, because the longer run measures of the PCE Core fell short of two percent up to the beginning of, and one year into, the Pandemic. That is the result of years undershooting the target.
As of February 2020, the 10 Year average for the PCE Core was +1.6% and the 20 Year was +1.7%. In the ten years up to February 2020 the PCE Core annualised rate was as high as two percent…only ten times!
Graph 3
…AT THE END OF THE DAY, THE FED DIGESTS THE CPI DATA…BUT DECIDES POLICY BASED ON THE PCE AND PCE CORE.
The high rate during that time was +2.1% in January 2012. As we all know, the lack of inflation infuriated the Fed and led them to change their view of how to deal with inflation, a decision that was unveiled at the 2020 Jackson Hole conference… timing… is...... everything!?@?&%?! (Graph 4)
The CPI Core readings move the market and influence Fed policy… …duh!
I am not trying to distract your attention from a key economic release…but it is worth noting that at the end of the day, the Fed digests the CPI data…but decides policy based on the PCE and PCE Core.
IT IS WHAT IT IS… AND IT AIN’T…WHAT IT AIN’T!
Keep in mind that the CPI Core usually runs hotter than the PCE Core, almost constantly in the last ten years. The premium for the CPI occasionally gets as high as one percent. However, the current difference of about a half a percent is pretty close to the median…over the longer run!
Source: Bloomberg Finance L.P. Graph 4
Lou Brien E:
lbrien@drwholdings.com T:+44(0) 312-542-1136
Source: Bloomberg Finance L.P.
23 | ADMISI - The Ghost In The Machine | Q4 Edition 2024
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