Inflation is still in services, no progress in 6 months. Another bummer: Durable goods deflation, a contributor to cooling inflation, may be over.
By Wolf Richter for WOLF STREET.
Powell addressed the PCE price index situation in advance when he was asked during the FOMC press conference on Wednesday – as the S&P 500 was tumbling after the rate cut and Powell’s not so soothing words – how much the Fed is “looking through” some of the high inflation numbers that came out recently. And Powell replied, tinged with his dry humor:
“We always try to be careful about not throwing out the numbers we don’t like. It’s just an occupational hazard to say, ‘look, oh, those high months are wrong.’ What about the low months? We have a very low month potentially in November. It’s estimated by many to be in the mid-teens for core PCE. So that could be low. We try to look at not just a couple or three months. We shouldn’t. Our position shouldn’t change based on two or three months of good or bad data.”
And the month-to-month increase of the November core PCE price index was indeed “very low,” even lower than in the “mid-teens” that Powell had cited: The core PCE price index decelerated to +0.11%, so that would be the “low teens,” according to the Bureau of Economic Analysis today. Annualized, 1.4%. This deceleration came after the sharp acceleration the month before (blue line).
The six month-average however, which irons out some of the month-to-month squiggles, accelerated to 1.89% annualized (red), and the year-over-year reading, as we’ll see in a moment, also accelerated to +2.82% (from +2.79%).
And Powell added on Wednesday: “We have a long string now of inflation coming down gradually over time. As I mentioned, I think the 12-month headline is 2.5%, 12-month core is 2.8%. That’s way better than we were.”
And he added: “We still have work to do though, is how we’re looking at it. And we need policy to remain restrictive to get that work done, we think.”
Year-over-year, the big change is in durable goods (green in the chart below). Prices of durable goods – new and used vehicles, appliances, consumer electronics, furniture, etc. – have stopped plunging, after the huge price spike in 2020 to mid-2022. With months of slight month-to-month increases and decreases under the belt, the 12-month PCE price index for durable goods was barely negative at -0.4% in November.
The falling prices of durable goods since the second half of 2022 had been a big contributor to the deceleration of inflation, but that’s now over.
As a result, the core PCE price index (+2.8%, red) and the overall PCE price index (+2.4%, blue) accelerated further year-over-year in November.
Inflation is still in core services (gold), running far hotter than before the pandemic, including +3.8% year-over-year in November, which was higher than the readings in June, July, and September, and there hasn’t been any progress at all over the past 6 months.
Core services are about 65% of consumer spending and include housing costs, insurance of all kinds, health care, education, subscriptions, transportation, broadband, personal care services, financial services, food services & accommodation, etc.:
Food inflation has started to accelerate again in recent months but remains fairly low. Inflation is a rate of change, so a deceleration means that it increases at a slower rate. But prices are a level, and that price level is very high, and because of the current inflation continues to creep higher.
In November, the PCE price index for food and beverages purchased for off-premise consumption rose by 3.0% annualized from October (blue in the chart below).
Year-over-year, it accelerated to +1.4%, the biggest year-over-year increase since March, and up from the +1.0% to +1.2% range in the prior months.
Food is not included in the core PCE price index, but it is included in the overall PCE Price index, and the sharp deceleration of food prices was a big contributor to the deceleration of the overall PCE price index, and that may be over as well.
Energy prices increased in November from October by 3.0% annualized, the first meaningful month-to-month increase since April (blue). These are energy goods and services that consumers buy directly, such as gasoline, natural gas piped to the home, electricity, propane, heating oil, etc.
Year-over-year, energy prices are still down by 4.0%, but that’s the smallest year-over-year decline since July.
As everyone knows, energy prices cannot and won’t drop forever, though they’re very volatile and can plunge for a long time, just like they can spike for a long time. Energy prices were another big contributor to the deceleration of the overall PCE price index in 2023 and 2024, and those declines may be running out of steam as well:
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Yesterday my friend said she was going to buy a new Tundra. The local Toyota dealer offered her the same amount she paid new from that same dealer for her 2018 Tacoma which now has 47,000 miles on it. Now that’s inflation.
And then she really got scalped on the new one – which is a true POS compared to the old one.
Wonder how much of stock declines is inflation picture and how much is drama around government shutdown. It never happens but I suppose the odds might be higher now. Markets like consistency and gtidlock and not sure the next two years will be that. They do like deregulation and tax cuts so hard to say what anything will look like.
I agree with Powell. The heavy lifting is already done. We’re down from over 7% to 2.4%. Honestly, who cares if its 2.5% or 2.2% or 2.0%, besides the media and gamblers playing the markets. The war is won. It’s minor adjustments at this point.
What we need to worry about is that unexpected crazy event that triggers a recession.
I’m starting to think you are right. He’s done a good job so far. Now if the red haired one doesn’t try to push interest rates to zero, we should be OK, except for the huge government debt and spend-crazy Congress.
This is Wall St talk because FED itself has said they care taking to 2%. This is reflected in various statements including FOMC meeting.
Who cares is American People care. Today you can say who cares for 2.5 then 3 and then one day you can who cares about inflation.
Most people hate inflation. That too prices went up so crazy, people still are catching up on thier wages and incomes. Most important is if people think FED doesn’t care inflation expectations wont be anchored too and that will be bigger issue.
Looks like the long duration treasury market may finally be coming to terms with the future. Likely another bear market rally coming soon. But it seems the bond market may finally be figuring out that depending a bigger risk premium makes sense because (1) Trump wanting to remove the debt ceiling completely (or at least for 2 years), (2) the inflationary effects of tariffs, (3) the inflationary effects of cutting corporate tax rate to 15% and (4) all the spending cuts that DOGE is supposed to push through look small in comparison to the deficit.
TLT in bear market for almost 5 years. At some point the bond vigilantes are going to be back. Feels like waiting for Godot at this point… but today is likely a preview of things to come.
It appears to me nobody is fooled in here. Too many dollars chasing too few goods and services. Inflation. Trump will have none of it. Just another in a long line of klownsians. Will it ever stop?