In a broader sense, there has been no progress at all on inflation in eight months.
By Wolf Richter for WOLF STREET.
The sharply falling prices since mid-2022 of energy such as gasoline, and durable goods, such as motor vehicles, had contributed a lot to the cooling of inflation measures. But prices cannot fall forever – they can rise forever, but they cannot fall forever, and they stopped falling. And on top of it, services inflation has gotten stuck in mid-2024 at too high levels.
As a result, overall inflation indices, including the PCE price index released by the Bureau of Economic Analysis today, have started accelerating again on a year-over-year basis. The driver of inflation has been and still is in “core” services, which, at 3.8% year-over-year for the core services PCE price index, remains substantially higher than before the pandemic (yellow in the chart below).
In a broader sense, there hasn’t been any progress on inflation since May (black box in the chart below), with the Fed’s favored inflation measures well above its 2% target, confirming the Fed’s pivot this week to a wait-and-see strategy.
The PCE price index accelerated for the third month in a row, to 2.6% year-over-year in December, the worst increase since May 2024 (red in the chart above). The Fed’s target for this measure is 2%.
The “core” PCE price index, which excludes the volatile prices of food and energy products, remained at 2.8% for the third month in a row, and these three months have been the highest since April (red in the chart below). The Fed’s target for this measure is 2%.
The “core services” PCE price index has gotten stuck at around 3.8% with only minor fluctuations for the seventh month in a row (yellow in the chart above).
This year-over-year rate in the core services index is between 35% and 70% higher than before the pandemic (ranged between 2.2% and 2.8%).
As we’ll see in a moment, on a six-month basis, which reacts faster but is more volatile, there has been no progress at all for 12 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.
The durable goods PCE price index has ended its historic plunge, and on a year-over-year basis, the index is at the 0% line, meaning no change year-over-year (green in the chart above). In late 2023 and early in 2024, the big negative readings of about -3% contributed a lot to cooling the PCE price index as well as the core PCE Price index.
The durable goods category is dominated by new and used vehicles, which have seen huge price spikes in 2021 and 2022. Used vehicle prices then plunged through mid-2024, but in recent months started rising again. New vehicle prices have been sticky at very high levels and have barely come down. Durable goods also include appliances, furniture, computers, cellphones, other consumer electronics, sporting goods, such as bicycles, etc.
Month-to-month and six-month.
The PCE price index accelerated to +0.26% (+3.1% annualized) in December from November, the worst increase since April 2024 (blue in the chart below).
The six-month PCE price index, which irons out some of the month-to-month squiggles, started reaccelerating in November, and in December rose to +2.2% annualized (red):
The “core” PCE price index accelerated to +0.16% (+3.1% annualized) in December from November, the worst increase since April 2024 (blue in the chart below).
The six-month core PCE price index has been in the 2.3% annualized range for fourth month in a row (red):
Inflation is festering in “core services.” The core services PCE price index accelerated to +0.29% (3.5% annualized).
The six-month index has been accelerating slowly since the July low point and in December rose to +3.4% annualized, right back where it had been in December 2023, and despite some volatility, there has been no progress at all in a year (red):
The PCE price index for housing costs (rent), the largest component of the core services index, has been decelerating in a zigzag manner for two years.
But the six-month average, which irons out a lot of the zigzags, is now showing that the deceleration stalled. It accelerated a tad in December to 4.3%:
Food inflation has started to accelerate again. Food prices have been very high following the spike through 2022. Since then, the pace of increases of those prices (that’s what inflation measures) has slowed dramatically. But recently, food-price increases have started to accelerate again.
On a month-to-month basis, the PCE price index for food rose by 0.24% (2.9% annualized) in December from November.
The acceleration in recent month has caused the year-over-year index to accelerate again, and in December it rose to +1.6%, the biggest increase in 13 months.
Food is included in the overall PCE price index, and the sharp deceleration of food prices was a contributor to the deceleration of the overall PCE price index, and that may now be over as well.
Energy prices spiked in December from November by 38% annualized, the biggest increase since August 2022. So here we go again.
These are prices of 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, the PCE price index for energy is still negative, but barely at -1.1%. Energy prices weigh heavily in the overall PCE price index. They cannot and won’t drop forever, though they’re very volatile and can plunge for a long time, after a big spike. They were a big contributor to the deceleration of the overall PCE price index in 2023 and 2024, but that help may be fading out:
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I am sure DEI is the cause of stuck inflation…cure would be lower interest rates, yeah that will fix it.. /S
Definitely getting my popcorn out for this one..
I think we need price controls and college loan forgiveness.
Yeah all that college loan forgiveness that was going on everywhere in the world all at the same time. Yeah that’s why inflation was high worldwide. Don’t forget your other talking points about immigrants!
With housing, we already have supply side controls in the form of zoning and permitting. Price controls on the demand side would simply make the market fairer (in the form of citizen-only and occupant-only purchasing and rent controls). If you want a “free” market, you’d need to remove the supply-side controls and let me build wherever, whatever and whenever I want.
I am in agreement with the citizen only and occupant only requirements for single family, but also know that occupant only would seriously restrict the ability of people who want to rent a house to do so.
Citizen only seems like a no-brainer, but I can see dozens of ways around that.
Nope. The cure is going to be tax cuts for billionaires and big corporations, combined with higher tariffs at the border. Combined with chasing all the foreign born farm workers out of the country.
That will fix it for sure. (sarcasm)
What?? You mean I will have to start cutting my grass myself again? /s
The wealth will trickle down any time now.
Lol, yep the mega donors and the chief’s staff are circling the wagons. Now us frontiersman have to wait and see. Hasn’t this circus been a repeat before? We need to get rid of some of us, really fast, that will cure and right the ship.
IDK,
I see a lot of over-inflated, over paid, over educated,
over titled do nothings begging for plumbers.
Maybe that explains it, see services inflation.
How to fix it, more plumbers?
Correlations in financial markets seem to be coming apart in all kinds of places.
Maybe pivot to ZERO QT!
Why not? /s
…….but don’t call that a “bailout”, call it a normal way of good policy.
The heavy weighting of housing would seem to suggest that it is the core of the problem.
And, considering the monumental importance the Fed has put on “wealth effects” during the long night of ZIRP (turning real interest rate cashflow declines into vaporous asset inflation), they are likely terrified of the flipside “poverty effect” of significant housing asset price reductions (think about how central housing inflation is to the current crisis and how relatively little political hay has *really* been tried to make of it – by either party. They are in a box canyon of their own making and they know it).
Considering the potential political capital, neither party has said very much about housing inflation – because they are terrified of touching the mechanisms behind it.
The terrible problem is that housing inflation has to come down but the powers that be are absolutely terrified of the “poverty effect” they think that means – thinking their phoney-baloney, ZIRP summoned housing “wealth effect” saved the country for 20 years.
In the long run, the only thing that saves countries is international competitiveness, not paper-driven asset valuation manipulations.
(Along these lines, Trump’s tariffs are likely fairly terrible ideas – but the US is so debilitated and so deluded about it, that those tariffs might be necessary to create some space/time for industrial rehabilitation. Or they could simply become the next heroin).
Let the festering continue ( or not):
From Fed Schrödinger Cat Model:
“Employment has grown persistently since 2021 (albeit at declining rates), and the unemployment rate has stayed low. Under this view, inflation will remain elevated for as long as the labor market remains tight.”
Very clear now that the 100 basis points cut since September of last year was a mistake.
Mr. Wolf writes: “In a broader sense, there has been no progress at all on inflation in eight months.”
“Inflation is always and everywhere a monetary phenomenon.” Milton Friedman
When you let off the brake, you keep moving. Sooner or later there is either a recession or increase in interest rates to cure the inflation that the monetary authorities created themselves. Alternatively, inflation will demand higher interest rates for the debt; solved through borrowing or more Quantitative Easing (QE), but the inflation the stop gap measures cause is a “positive feedback loop” that is the definition of an unstable control system.
LOL. We are in hyperinflation. The fiat dollar is finished..
🤣 send me your finished hyperinflated worthless fiat dollars. As a free service to you, I promise I will dispose of them properly in accordance with all applicable laws and regulations.
I’ll pay you 10 cents for each of those worthless dollars if you send them to me instead of Wolf.
Progress has been transitory?
I’ll say this again, as it didn’t seem to get posted last time. As Wolf is documenting, the overall trajectory for inflation is up. The Fed knows this and doesn’t want to look like they have lost control. Tariffs incoming as well, that will increase inflationary pressures.
Keep trimming the balance sheet Jerome! LOL!
The medicine for inflation is very bitter (recession, high unemployment). It takes some suffering before politicians are bold enough to administer it (the Fed doesn’t operate outside the political sphere – for example, if a monetary policy action would help war aims, they would do it).
Bernanke touted the “high pressure economy”, with inflation being accepted at 3 percent.
Inflation likely played a role in the “red wave”. In the late 70s some 40 percent of the house of representative was voted out (if you google “incumbency rates open secrets”, you can see a chart).
However, high private debt can act as a brake on spending and inflation, it seems to me. The New York Fed Report on Debt and Credit shows very high household debt. The Money Velocity chart from FRED shows a strong rebound around the time inflation kicked up. Perhaps the powers that be are looking to see how 3 percent inflation with high debt works out.
“The New York Fed Report on Debt and Credit shows very high household debt.”
I thought household debt was at an all-time low vs e.g. 2010.
Uncle Sam is the one running up the credit card bill these days…
Nothing that lower interest rates, tax cuts, bigger deficits and wide ranging tariffs can’t fix.
These charts are going up and down, with no sustained improvement towards the Fed’s goals for inflation. It looks like inflation is not going away anytime soon.
Potato chip bags getting smaller and larger: at a higher price.
And, many more examples.
B
Ooops!
should be smaller and smaller.
sooner people start buying organic the better. youll have more trust in what you put in your body as the FDA goes which way now??? and per bite/ morsel much more dense flavorful food . I think my grocery bill has gone down since I have been transitioning to organic for various reasons . from cereal/bananas/ grapefruits/ tomatoes/milk/ occas bag of tortillas/wild caught seafood/ small dark chocolate bars for the occas treat….and other….at same time happily cut out that junk food called bread in the process. choices are there.
Greedflation is clearly a thing (PE overlords at my old job sent an expert consultant to direct us how to aggressively implement price hikes with volume reduction in our business, and ways to pursue customer lock-in to make them eat it), but isn’t inflation also something we should inexorably expect from the de-facto legalization of real-time price-discrimination across the economy? The new MO is to set the base price the old fashioned way, then use the tools of surveillance capitalism to gouge the top half of customers to their exact walk-away points. You can literally visualize the sellers filling in the triangle on your econ 101 P vs. Q chart to capture any iota of “consumer surplus” that used to exist. Doesn’t that theoretically have to result in inflation?
Today must be national sarcasm day based on the comments here so far…
It is simply amazing how much greedflation is to blame. But hey, those rising profits aren’t going to fund those aggressive sharebuybacks on their own. As for inflation, welp, Saturday tariffs gonna be fun. So will Powell do the handwave about the price increases due to tax increase? Dunno.
My guess is pause until they have to raise, because dammit, politics.
Stock up folks, it is going to be ugly.
Someday this war’s gonna end…
I don’t usually comment on non-core inflation, but prices at the supermarket (I shop at Walmart and Sprouts) are going up at a pretty incredible pace. Next overall CPI print should be an eye-opener.
The USA has been firing on all cylinders. Energy independence, technology leadership, AI leadership, etc. Thus we have low unemployment and increase in salaries. This means it is more difficult to get inflation to down.
I am not sure if anyone has noticed that Germany is in the 3rd year of economic contraction. France this past month went into contraction. Canada is hurting. China has been in a mess since COVID. So all of the above countries have low inflation but struggling economies and rising unemployment rates.
Now tariffs are going to hit these same countries the rely on exports.
Anyway, most Central Banks have been cutting rates and signal they need to cut more.
The U.S. is still the best place to be economically even if inflation is sticky.