Inflation Horror Show. The Fed has got a problem on its hands.
By Wolf Richter for WOLF STREET.
The Fed pays particular attention to the Personal Consumption Expenditures (PCE) price index. The “Core PCE” price index (which excludes the volatile food and energy components) is its measuring stick for the 2% inflation target. Powell has been pointing at the services components of the PCE price index as a hotbed of inflation. And the PCE price index for January, released today by the Bureau of Economic Analysis, was a horror show on all counts.
Not only did all the relevant measures get a lot worse in January, but the prior three months, October through December, were revised higher – much like the CPI inflation readings a couple of weeks ago – showing substantially greater inflation momentum at the end of the year than originally shown. The whole thing throws a lot of cold water on the “disinflation” hoopla.
Inflation rages in services.
On a year-over-year basis, the PCE Price Index for services spiked by 5.6%, the worst since 1984. December, November, and October were all revised up sharply. This is where inflation is running hot, and services is nearly two-thirds of consumer spending. This is where the inflation action now is, where it’s entrenched and self-propagating:
On a month-to-month basis, the PCE price index for services jumped by 0.6% in January from December. December was upwardly revised to +0.6% from +0.5%. There is just absolutely no slowdown in sight. This is the center of the horror show:
The Core PCE price index turned red-hot again.
On a month-to-month basis, the core PCE, which excludes food and energy, jumped by 0.6% in January from December, after having jumped by an upwardly revised 0.4% in December. This jump was largely driven by red-hot inflation in services. But this time, goods prices rose too, after having declined in prior months.
The month-to-month down-trend in October and November was just a classic inflation head fake:
On a year-over-year basis, core PCE jumped by 4.7%, up from 4.6% in December, which was revised up from the original +4.4%. November was also revised up to +4.8%, from originally +4.7%.
And goods prices are rising again!
In the second half of last year, prices of goods declined, driven by the plunge in gasoline prices and other energy prices and by the decline in prices of used vehicles, electronics, and other durable goods.
But in January, this ended as consumers went out and splurged – we have already seen this in retail sales reported by retailers, where people demonstrated that they’re in no mood for any kind of landing.
The PCE price index for durable goods – new and used vehicles, appliances, furniture, etc. – rose by 0.3% in January from December, after having been negative for three months in a row, and having been negative for five of the past 10 months.
This increase removed downward pressure on the Core PCE price index and on the overall PCE price index:
The PCE price index for energy, which had plunged on a month-to-month basis in the second half last year, jumped by 2.0% in January from December.
The PCE price index for food was heavily revised upward for the last three months of the year. In January, it rose by 0.4% from December.
The PCE price index for all goods (durable and nondurable) jumped by 0.6% in January from December, a sudden turnaround.
Goods prices had been the force that had pushed down on inflation, while services pushed up inflation. But what we’re now seeing is that goods prices are rising again, and they no longer push down on inflation, and services are pushing up inflation unopposed:
On a year-over-year basis, the PCE price index for all goods increased by 4.8%, down from the December pace of 5.1% (originally +4.6%).
The overall PCE price index for all items jumped by 0.6% in January from December, the worst increase since May last year. On a year-over-year basis, the index jumped by 5.4%:
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