Services inflation rages, but the durable-goods PCE price index had biggest month-to-month drop in years: yardstick for the Fed’s inflation target.
By Wolf Richter for WOLF STREET.
The Core PCE price index, the yardstick the Fed uses for its inflation target, was released today by the Bureau of Economic Analysis. It excludes the always volatile food and energy products to present a picture of underlying inflation. Many goods prices have declined on a month-to-month basis as inflation has shifted from goods to services.
And Powell has been hammering on the services segments within the PCE price index, where inflation has risen and persisted. About two-thirds of the money that consumers spend goes into services – so the services PCE is the biggie. And inflation is much harder to uproot from services, as Powell pointed out, which is why he said the Fed would keep an eye on inflation in services.
The PCE price index for services rose 0.4% in November from October, same as in the prior month, and roughly double the rate before the pandemic. It zigzags up and down, as month-to-month inflation readings do, but the trend is not down. There isn’t even a convincing sign of a turning point in the uptrend:
On a year-over-year basis, the PCE Price Index for services rose 5.2%. It has now been above 5% for the fourth month in a row, and is not showing any signs of a substantive decline. This is very discouraging – and source of the frustration that Powell recently expressed:
But the PCE price index for durable goods – new and used vehicles, appliances, furniture, etc. – is definitely showing a downtrend, and has turned negative on a month-to-month basis for the second month in a row. In November, it dropped by 0.8% from October, the biggest month-to-month drop in years:
These month-to-month declines whittled down the year-over-year increase of the PCE price index for durable goods to just 2.8%, the lowest since March 2021:
The PCE price index for nondurable goods also declined month to month (-0.1%); and the index for all goods declined month-to-month (-0.4%).
Those charts above show what is going on with inflation: Goods inflation is coming down, but services inflation is high and not improving.
The Core PCE price index for goods and services, on a month-to-month basis, has served up a number of head-fakes since early 2021, as month-to-month inflation indices do. It gets worse for a few months, and then it gets better for a few months and then it gets worse again. This is a fear and frustration that Powell also expressed in his speech a month ago, when he said that “down months in the data have often been followed by renewed increases.”
So in November, it got better for the third month in a row, rising 0.2%, which seems to be encouraging. But just looking at the chart, I fear that the next leg up may be coming soon:
On a year-over-year basis, the core PCE price index rose 4.7%, same as in July. This would be mildly encouraging, but it was driven by the improvement in the goods-based indices (thank you!), while services inflation, where inflation matters the most because that’s where people do most of their spending, continues to rage:
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