Month-to-month, core services inflation jumped while durable goods deflation deepened, and so core PCE price index hits Fed’s target.
By Wolf Richter for WOLF STREET.
The “Core” PCE price index, the Fed’s primary yardstick for its 2% inflation target, rose by 2.62% from a year ago in July, a hair up from the June reading of 2.58% (red in the chart below). This “core” index attempts to show underlying inflation by excluding the components of food and energy as they can be very volatile, spiking and plunging with commodity prices (red in the chart below).
The overall PCE price index, which includes the food and energy components, rose by 2.50% year-over-year in July, also a hair up from June’s 2.47% (blue). Within it, energy prices edged up year-over-year by 0.2%, and food prices rose 1.4%.
The “core services” PCE price index rose by 3.72% in July, down a hair from June’s 3.81% increase (yellow). But the durable goods PCE price index fell less than in the prior two months, in July by -2.5% year-over-year. May’s drop of -3.2% had been the biggest drop since 2004 (green):
The month-to-month moves.
The “core” PCE price index rose by 2.0% annualized in July from June (not annualized, +0.16%), same as in June. Both months were right on the Fed’s target (blue in the chart below).
Within it, core services inflation accelerated sharply in July from June (+3.3% annualized), while the durable goods index dropped deeper into the negative (-3.7% annualized). Those two forces combined, pulling in opposite directions, caused the index to rise by 2.0% annualized. And that has also been the dynamic we’ve seen so far this year: Durable goods prices are deflating sharply from the pandemic spike while services inflation is still uncomfortably high.
The six-month annualized core PCE price index, which irons out the month-to-month squiggles and revisions, and which Powell cites a lot, decelerated to 2.6%, as the January spike fell out of the index (red):
The “core Services” PCE price index accelerated to 3.1% annualized in July from June, up from 2.25% in the prior month.
The six-month core services index decelerated sharply to 3.26%, the lowest since February 2021, as the spike in January fell out of the six-month period.
Core services include housing, healthcare, financial services & insurance, transportation services, non-energy utilities, communication services, recreation services, food services & accommodation, and “other” services.
The housing costs PCE price index, which is part of core services, rose by 4.78% annualized in July from June, reversing the outlier drop in the prior month.
The six-month index decelerated to 4.8% annualized, and that’s still very high:
Durable goods PCE price index fell in July from June by 3.7% annualized. Durable goods include motor vehicles, recreational goods and vehicles, appliances, electronics, furniture, etc.
The six-month index fell by 2.1% annualized. The durable goods index tends to run in a slightly negative range during normal times amid manufacturing efficiencies, technological improvements, and globalization. It’s the services that have been the driving force of inflation for many years, which is why we pay so much attention to services.
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More fuel for MSM to push even harder for a bigger rate cuts in Sept…no, actually cut now..see inflation is slowing down…all is good, plus Pow Pow is starting to lose his inflation cover more and more…
I suspect Powell will come out soon and say that inflation was transitory after all.
Ha! I can definitely see that. And it only took the fastest rate hikes in history and trillions in QT to get down to this point.
Hahaha that was a good one.
Lol, certainly their acknowledgement of it was!
Funny but BS. Powell already publicly admitted they were wrong and even went through the trouble to explain the (wrong) reasoning as to how they came to that “transitory” conclusion. (Simplistically: The historical models used for prediction didn’t know how to account for QE.)
Nobody is right all the time and the best any of us can do is learn from our mistakes which the Fed seemingly has.
Thanks for the education, as unsettling as it may be. The economic environment which, right or wrong, has prompted the Fed to advertise a substantial easing of monetary policy. Mission accomplished, now we can stimulate an inflationary economy, yesterday.
Seems, kind of the twilight of the binge. Being the first day of the most historically bad month for stock market performance, I completely understand the obvious skittishness.
Aggravated by the fact that the number of potential currently inflated bubbles has exceeded precedence by a wide margin.
What me worry.
It appears that the most painful part of the inflation over the last 3 years or so was in durable goods. People were used to 1 or 2% deflation in these areas which makes sense for productivity increases. And services inflated steadily at ~2%. When actual goods saw 7%+ inflation that was alarming. I replaced a washing machine during this time, cost twice what the last one had. The economy seems to have been moving in a “fewer kitchen appliances, more dinners out” direction. If services settle out at 3% inflation people will adapt. A little less going out, a little more dinner at home. One fewer day on the Disney trip, haircuts every five weeks instead of four.
I stopped getting haircuts when covid started. I bought good hair cut sets and now do it all in house.
BTW: Haircut pre covid was $11, now $17. Ofc, these are the cheap bare bones barber shops where I used to get my hair cut.
I live minimalist life style and this suits me.
I remember when a bunch of Jiffy Lube franchisees declared bankruptcy in 2008 and 2009. They explicitly said that their customers were not going elsewhere or changing their own oil… instead they were coming in every 5000 miles instead of every 3000 miles. Even my local barber held off on raising prices for several years during the Great Recession because of what you say here… there is not much difference in how you look if you let your hair grow for an extra week… but it matters to your barber’s bottom line A LOT!!!
And a nicer range, oven, fridge, and dishwasher for those dinners at home.
I think a huge part of the deficit picture is the export deficit when isolated by the famous Keynesian equation:
GDP = C + G + E – I
since GDP is the best measurement we have, we examine the components individually.
First up is C, personal consumption expenditures, 75 %
G = government expenditures 26 %
X – I , net exports minus imports -(negative) 6 %
Wait a minute. You forgot investment entirely.
GDP=C+G+I+NX
The C stands for consumption. The G stands for government. The I stands for Investment. Then there’s a thing called net exports (NX), which is Exports minus Imports.
Aldo, consumer spending was 68.6% of GDP in Q2, not 75%. It was never 75%.
Given the continued strength of the underlying economy, and consumers still spending like drunken sailors (see last month’s retail sales report), how much longer can goods deflation last?
If goods were flat right now instead of deflating, overall inflation would be above 3% given where services is.
In physics, the concept of momentum is simply demonstrated by having a person sit in a swivel chair holding a lead lined bicycle rim. The point being, like the momentum of the heavy wheel, it will continue until it is restricted.
And no one really wants to stop the wheel because it hurts the people we love. For most of us, the people we love are plain, not glamorous.
Just the plain old heartbeat of America.
Oh never mind, I reread the last paragraph. Due to hedonic adjustments, goods will tend to be slightly deflationary during normal times. If the new iPhone has 50% more storage but is “only” 10% more expensive, you’re getting 40% more bang for your buck according to the government. This methodology pretty much ensures inflation will never be high outside of supply shocks.
Prices of motor vehicles are actually FALLING in the real world. Used car prices have PLUNGED in a historic manner off the crazy spike (retail and wholesale). We’ve long discussed this here. That’s the main driver in this big bout of durable goods deflation.
I don’t get into the details here because I do that with the CPI report, which comes out two weeks earlier. So you can see the details for durable goods here:
https://wolfstreet.com/2024/08/14/beneath-the-skin-of-cpi-inflation-month-to-month-acceleration-services-cpi-bounces-back-from-outlier-housing-cpi-surges-plunge-in-durable-goods-slows/
In your prior comment, you asked how long can this durable goods deflation last? So you nailed part of the answer. The other part of the answer is that durable goods deflation will slow after motor vehicle prices stop falling, like they’re right now. Used car prices will stop falling pretty soon, but new vehicle prices have proven to be very sticky at high levels; they’re now coming down, but slowly, so this could drag out. What would need to happen for new vehicle prices to come down faster would be a big drop in demand, but that hasn’t happened. 2024 is the best year since 2019. Right now, prices are coming down where there is a lot of inventory, such as in high-priced trucks. Some more economical vehicles are in short supply, and prices are sticky there.
I remember you use to make plots showing the price popular car models over time. Is there a recent update to them? I assume the F150 has come down recently but how do the price changes compare to the Camry?
The plot is an annual plot of MSRPs F-150 XLT v. Toyota Camry LE. But the discounts are off MSRPs that have gone up. And so the discounts aren’t reflected inthe chart. During the pandemic, there were addendum stickers on top of MSRP, and that wasn’t reflected either. So the last few years were kind of rough on this chart. Now, Toyota is discontinuing the Camry LE model used for this chart, and so I can longer maintain the chart. So the fall of 2023 version was the last one I did:
https://wolfstreet.com/2023/12/15/the-shocking-price-increases-of-the-pickup-truck-oligopoly-ready-for-tesla-to-mess-up-their-party-f150-xlt-camry-le-price-index/
Was the discontinuation a one-off thing for 2024 or something Wolf? – because when I go to Toyota’s website it still lists it as available to build:
“Build Your 2025 Camry The 2025 Toyota Camry has 4 trims available: LE, SE, XLE and XSE. Select a trim to begin your build”
It looks like the LE is a hybrid powertrain now – so that’s different I guess..
Yes, the hybrid powertrain makes it useless for me. To be comparable, it would have to be the base version LE, no options. That’s how it’s always been, otherwise you get apples and oranges. Hybrid adds $2-3,000+ from first glance. So it’s now a different model.
It appears that inflation has started to reaccelerate as they are about to start cutting rates.
Probably still won’t stop the Sept rate cut at this point. The data so far is not providing enough ground for them not to cut given how much hopium and pressure the market has placed on this rate cut. With everything priced in already, if there’s no cut, market likely will react badly which probably will erode the soft/no landing optics especially if unemployment rates start to reverse course fast after..
Of course if there’s a cut, it will just be a beginning of s*** burger serve to savers or people that don’t want to buy into sky high valuation of stock and assets IMHO
Personally, I think the concept of 2% inflation target is questionable.
Inflation is the policy strategy. Whether it accelerates is like asking has been inflation been stomped out back to the banking industry’s 2% target. A level that assures a comfortable return for the financial business that, like you and me, prefer risk free transactions.
Which is why I’m only buying short term treasuries. Who wants to overpay a holder of an over priced asset, just as the price is negotiable.
Congratulations on being the first on Alpha to comment on PCE results and to do so in an unbiased fashion.
To quote whomever “Just the facts, ma’am”.
Howdy Jim. Joe Friday aka Jack Webb. YEP, back when the truth was truthful.
Higher for longer.
I hope so…. T-Bill buyer
Not much risk that the T bill rate will remain at 5% + for at least the next six months, The Ireasury note market seems like a mine field as long term rates adjust to a market determined rate rather than a Fed controlled rate.
If it keeps on rainin’, levee’s goin’ to break
If it keeps on rainin’, levee’s goin’ to break
Cryin’ won’t help you, prayin’ won’t do you no good
No, cryin’ won’t help you, prayin’ won’t do you no good
When the levee breaks, mama, you got to move…
In the dire circumstance you described, I think that the lyric, ” Cryin’ won’t help you, prayin’ won’t do you no good” captures a moment in life that we all felt that way.
Then the sun came up.
Howdy Folks. YEP, they know what they are doing. Bet Yall 50 cents that the FED will have to raise to double digit interest rates someday… May take a decade for that to happen .. Inflation is here for a long long time…….
Lone Wolf housing charts may continue to show peak after peak???
DM: Kroger admits to unnecessarily making your breakfast more expensive: ‘Greedflation is real’
Kroger has admitted to raising the cost of essential items more than was needed to keep pace with inflation during a court hearing.
‘Companies across multiple industries have been posting record profits since the Covid-19 pandemic while consumers have faced the highest inflation in recent history.
‘The math can only point to companies raising prices above the general level of inflation. As the old saying goes, “Never let a good crisis go to waste.”‘
The planned $24.6 billion acquisition of Albertsons would reduce competition, the FTC says
It comes after Vice President Kamala Harris laid out her plans to introduce a federal ban on price gouging across the food industry if she wins the presidential election in November.
Price gouging is when retailers sharply increase the price of necessities, typically to take advantage of an adverse situation such as the Covid-19 pandemic.
Kroger is also being investigated over its use of electronic price labels on store shelves nationwide.
NYT ran a crap article about housing. The people in the comments section are defecating the author, and some cited conspiracy theories, etc. yatta. They said the interest rates were high, which, when I read it, sounded like the root cause of the housing issue. I thought it sounded odd because I’ve been looking at charts from the 80s when interest rates were in double digits. I thought, well, maybe we weren’t old enough to remember or too unintelligent to look at the data. Either way, it’s one reason I don’t read NYT as a source of news on the economy. They make me cringe.
– Mr. Market is quite clear: since the 1st week of 2023 he told us rate cuts were coming. Alas, Mr. Market also kept pushing rates higher since early 2023. But Mr. Market also kept pushing rates higher at the same time.
– In the past I wasn’t too sure rates would be cut because Mr. Market wasn’t that clear what he would do. But now Mr. Market is very adament rate cuts are coming because one ratio has broken to the upside signaling that Mr. Market has made up its mind.
Two years ago, everybody was talking about soft landing vs hard landing. The third scenario has happened: No landing.
Ultra-inflated asset prices fueling service inflation. And as far as I can see, neither of the presidential candidates are interested in any kind of landing. Actually, I think the proposals are quite the opposite: further re-fueling the asset prices and inflation by larger budget deficits.
FED cannot fight the prices alone with reckless govt spending. Stabilizing prices requires discipline in both monetary (reducing balance sheet) and fiscal (reducing budget deficits) policies.
Totally agree
Ponzi-
Valid points.
Don’t forget “Operation Twist” efforts at Treasury designed to bring longer rates down don’t help Fed’s halfhearted efforts to contain inflation on your list.
Eventually, government interventions like these, designed to “manage” the economy, lead to unintended and often drastic results. Currency hegemony, for example…
“Eventual loss of currency hegemony,” I should have said.
That is why the Fed has a mandate to control inflation, and it has failed miserably. 20% inflation in 3-4 years is a terrible result.
If the Fed did its job, legislators would be forced to do theirs.
Correct. Unfortunately CONgress has been long bought (captured) by the corporate world and the banking sector via K-street.
It all reminds me of the scene in blazing saddles where the sheriff threatens to kill himself…
Bank lending isn’t constrained by the FED’s policy rates:
https://fred.stlouisfed.org/series/TOTBKCR
If you click edit graph, format, log scale, apply.
You get a mostly straight line compounding at maybe 7%?
No arguments in favor of a 2% target vs a zero % target are convincing. There seems to be a superstition against falling prices whereby people fear that even a 1 % delation for 1 year would somehow lead to depression. This needs to be critically examined.
It sure does. Very critically. Esther George, as she was on her way out, even suggested as much.
It won’t be, though. We will never see a Fed in our lifetimes that ever–not even briefly, not even after a period of screaming inflation–wants to do anything but reduce the purchasing power of your savings.
Are americans capable of financially responsible self-government?
JT – …again, the whiff of slowly-boiled frog…
may we all find a better day.
Can we finally stop pretending that there is any doubt whatsoever about whether the Fed will cut in September?
The cut is now cemented. The only issue is if it’s a 25 or a 50. The next labor data might just push the market in one or the other.
Yep and I wouldn’t be surprised if the unemployment rate drops to 4.2% or 4.1%.
A 50 bpt cut would impart panic so I don’t think they will do it.
The Federal Reserve is likely to hold steady or increase the Federal Funds Rate at the September meeting.
You never fail to amuse!
If I were a betting man I would bet you that your second projection, ” increase the Federal Funds Rate at the September meeting.” is 99 pct is unlikely, in the next few weeks. They have already announced they intend to reduce the policy rate.
So keep your hand on your wallet and don’t sign nothing.
There will absolutely be doubt until Payrolls come out next Friday.
Looks like Toyota is offering the Camry LE for 2025. So, maybe the Camry LE Price Index lives on?
https://www.buyatoyota.com/home/vehicles/camry/
No, it’s dead, got stabbed in the back. The 2025s are all hybrids, and are about $2,000+ more expensive than the base LE was in 2024. The base LE in my index was the low end, after they dumped the L.
On second thought, I might try to have some fun with it. It’s always nice to see a chart with a spike like that hybrid spike.
Just change the name to the LOL model. After all, most of us Howard the Ducks are stuck in a transitory world we didn’t create. Now get quackin’ on it before someone calls “fowl ball” on the project.
You just need to be willing to adjust your data like all the big guys.
Take the most recent year where hybrid and non-hybrid were available, calculate a percentage adjustment, apply that percentage to your historical non-hybrid data.
No sense in throwing the baby out with the bathwater.
Alternatively, keep the data unadjusted and it still has value as “the price of a base Camry over time”
A rate cut in September will be the most reckless move the FED has ever made in its history, even worse than all of their QE shenanigans and their “transitory” nonsense.
We are at the peak of the biggest asset price/everything bubble in world history. To continue fueling it with cheap money by cutting interest rates before inflation has even returned to the FED’s “target” would be diabolical.
This cadre of central banker scum, beholden to the billionaires of the world, have hijacked the world’s economies and are busy harvesting the wealth of the working classes and handing it to the people who least need it. We’re right back to “let them eat cake.”
S&P up 25% YTD.
Sounds like a perfect time to cut rates and keep the party going.
I believe history states that interest rates cuts actually end the party after a celebratory cheers
I agree it would be an extremely incorrect decision. And I’ve been defending the Fed for holding rates steady, which I feel is the correct decision.
Sadly I suspect the Fed is under pressure to help the gov’t with its interest expense, going against the idea of central bank independence.
ohhh DC..DC..DC… you doth protest too much!
“the most reckless move .. in its history”?
come now.. one little cut hardly compares to what was foisted upon society back in 2007-2009.. you’re trying to compare a nuke with a firecracker. it isnt even the same, any way one looks at it. QE and all the other ‘shenanigans’ pulled by the fed back then created an entirely new version of market/economic/financial reality.
i can agree that a cut would be ill-advised. the fed sat on its hands and ‘waited to see’ for so long.. they can ‘wait and see’ for a bit more. there has been no solid indication that a cut should be upcoming in september.
but i expect that the fed will go ahead and do it anyway.
You always say this like somehow the world has changed. For all of recorded history, governments and their agents have ruled in favor of the wealthy. Why would they ever rule in favor of the poor and middle class? The poor have neither economic nor political power. The middle class aspires to wealth so they will never do anything to limit the power of the wealthy class.
You need to look at the wealth concentration charts again.
Well, Depth, good too be refreshed in a point of view that is contrary to the pablum we are fed by the Ivy League only reporters.
If a pile smells like dog excrement and looks like it with the same texture then it probably is a dog turd.
Good to hear from you.
The core of the problem remains; unaffordable prices simple become even more unaffordable…
The average person really needs some DEFLATION…
There is quite a bit of deflation in durable goods — including motor vehicles. See article.
LOL! Too bad you cannot EAT motor vehicles…
…but you can live in them, so that’s good news I guess.
Yes, but you can’t drive your ground beef and bananas and cereal to work — though I must admit that you can drive your lemon to work.