Driven largely by non-housing services. Just in time for the Fed meeting.
By Wolf Richter for WOLF STREET.
Back in April 2022, when the Fed’s favored inflation measure, the PCE price index, was surging towards its June 2022 high of 7.2% year-over-year, and core PCE to a high of 5.6%, the New York Fed came out with an inflation measure to track inflation’s “persistence.”
This “Multivariate Core Trend” (MCT) inflation measure is based on the same components of the PCE price index, but aggregates them differently. This MCT inflation rate, on a year-over-year basis, decelerated sooner than the core PCE and overall PCE inflation measures in 2022 and 2023, in effect successfully predicting their deceleration months in advance. And now it is predicting the resurgence of PCE inflation.
The MCT inflation rate for March accelerated to 3.0% year-over-year, the worst reading since February 2024 (red in the chart), according to the New York Fed today. The re-acceleration was driven largely by non-housing services and to a small extent by “core goods” components, even as the Fed-favored core PCE inflation (blue line) and overall PCE inflation (purple dots) decelerated year-over-year (my discussion of PCE inflation for March).
So now MCT, which attempts to show “persistence” of inflation, is predicting a substantial re-acceleration of inflation – the “persistence” part – driven largely by non-housing services and to a small extent by core goods. So housing cost inflation, as measured by rents, is no longer the driver of this inflation; it’s non-housing services and to a small extent, core goods.
Should we take this MCT seriously, after it was designed to run ahead of the surge of inflation in late 2020 and early 2021, and then successfully predicted the deceleration of core PCE and PCE inflation in 2022 and 2023?
In this inflation whack-a-mole, where inflation pressures shift to different products and services all the time, anything that can shed light on inflation’s next move – such as the concept of “persistence” in inflation – helps.
These kinds of data points are precisely why the Fed pivoted to wait-and-see. The inflationary pressures evident in the MCT inflation measure, especially in services, have not been impacted by tariffs. Whatever portion of tariffs might seep into consumer prices — instead of getting hung up in the record fat corporate profits that resulted from huge price increases during the free-money era — would still come on top of it.
Consumers hate hate hate higher prices, and now that the free money has vanished, they’re resisting further price increases on top of the already very high prices. Companies hike prices, consumers stop buying the product, price increases have to be rolled back to maintain sales. A slew of major companies have already conceded to investors that they would have to eat the tariffs this year. So passing on tariffs will not be easy. But whatever portion will seep into consumer prices could become persistent, rather than just a one-time bump: that’s another worry Powell has mentioned.
The Fed will meet on Tuesday and Wednesday, and will release its statement on Wednesday afternoon, and Powell will talk afterwards at the FOMC press conference, and there will be fretting over this “persistence” of inflation, and the potential for inflation to accelerate further this year, and the Fed apparatus will lean against the incessant demands for rate cuts.
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Kinda gives credence that the fed shouldn’t have ever lowered rates
Or even stopped raising them…
Article was way over my head…..but then I didn’t try to understand it very hard….hate finance….even hate paying bills…the physical action, even if I have the money.
Anyway..tea leaves significantly different? Don’t know? Well I guess I’ll see what the panel says.
Wonder if pow pow comes out with a statement inflation is persistent and hint at rate cuts is off the table for now, if our Dear King will fire off another round of threats to pressure lowering rates again, market drop, then backtrack.. Rinse and repeat…
Should be interesting, have my popcorn ready.. In the meantime let me switch more of my 401k out of stock and into fixed long term funds instead..
Well they should have never lowered them in the first place. It took one bad jobs print
I feel like the election was a factor. A big cut before as insurance against a market decline that sway voters, and then 2 small cuts afterwards to cover their tracks…
may sway voters
(I don’t suppose there is a way to add an edit feature to comments?)
Thanks…I had been trying to understand the meaning of that comment.
Or, it could just be that the data at the time showed it be be the best choice.
As Wolf has pointed out many times, the Fed rate is still well into “restrictive” territory above the inflation rate.
Barring a huge uptick in inflation, the current rate should continue to do the job.
J Powell is trying to reinvent himself into another Paul Volcker. I got news for him. You are too little too late. You ain’t no Paul Volcker and never will be.
I agree. In addition, Powell has been boxed in by Inflation, Trump / Tariffs & debt service costs. He can’t lower rates, while it would be suicide to raise them. Time will tell how long Trump keeps the big tariffs in place. Hopefully, China will come to the table my the end of May, but I won’t be surprised for the standoff to last through June. And even those are wags.
I keep getting tempted to change my long-concreted plan of 401k allocations…but then wouldn’t I feel like an ass if I miss QE3.0, which may come any day now?
(Look at what that dipshit in Turkey has been doing.)
When businesses go under their competitors raise prices.
1. But they’re not going under — with the exception of brick-and-mortar retail zombies that couldn’t compete with ecommerce. And stocks are not far from record highs. And even if a company files for bankruptcy, lots of times they come out the other end under new ownership and are still around.
2. The big problem is M&A/LBOs. They’re often designed from get-go to reduce competition. The government’s antitrust office has been asleep for two decades, though they finally came out of their slumber under Biden and they switched from decaf to regular coffee under Trump, but it’s too late, and they’re still too drowsy.
Nothing a few lines of won’t fix. But I’m not sure this administration has the interest in breaking up anything other than players that could disrupt their agenda.
Among the crumbled tidbits of news that I partake of these days, I saw a short video of Powell responding to questions about whether he would cave to Trump-tirades.
Having read “Lords of Easy Money” a couple years ago, Powell was portrayed as the main stalwart holdout against the free money shoveling Fed idiots / con men.
In the recent interview, Powell’s responses to questions about Trump pressure included several Powell comments that Fed decisions are BY LAW independent. Maybe he has more gravitas now after goldilocks landing, and won’t cave.
If he doesn’t help artificially / detrimantally boost the economy, Trump will find a way to fire him, no doubt.
Bessent isn’t backing Trump on this. Bessent has explained to Trump and to the public that what matters is long-term rates, and if the Fed cuts its short-term policy rates, long-term rates might rise again like they did in Sept 2024 through mid-January 2025 because the bond market starts to fret about a lax Fed and runaway inflation. Bessent understands this. He and Powell meet once a week. Trump isn’t going to fire Powell, in part because long-term yields would blow out and stocks would crash.
Powell doesn’t have that long left in his term, so the fireworks surrounding his firing would not be worth it (unless Trump wants fireworks).
And Powell will be a useful scapegoat if things head south. Which I believe is the whole purpose of an “independent” Fed Chair. As a constitutional matter, Congress cannot vest executive power anywhere other than in the hands of the President. But the illusion that Powell can’t be fired allows the President to play good-cop, bad-cop…
You’ve got it wrong, mate. Congress can’t vest power outside of the executive, that’s correct, but the powers that they create for the executive can be limited. Powell was nominated by “THE PRESIDENT” but can only be fired for cause. The constitutional question is the balancing of the legislative branch’s Article 1 rights to design executive powers vs the executive branch’s Article 2 rights to have executive powers vested in the president.
The supreme court has to balance these considerations (hence why the symbol of the legal profession is a scale)
Aka: Can congress design an executive power to hire someone, but not to also fire them. In this scenario the power is solely vested in the Executive, that’s never been in question.
Gobbledygook.
Under the Constituion no action can be taken by any executive employee without the effective consent of the President. The buck stops in the oval office.
And consider that Powell was appointed to his current term by the previous President not the current President. Thus Powell is a holdover from the previous adminstration. What is the point of having elections if executive power is not vested in the current President?
Finally, the inflation of the past few years constitutes cause for firing Powell.
Howdy Lone Wolf Right you are about the President. He says and does some things just for theatre. Like getting dressed up as the Pope. Was all for show to provoke a response. Lets hope real fair trade deals are made so the US sober / drunk sailors can purchase more made in America products as we sail on……
Trump didn’t get “dressed up as the Pope.” That was an AI-generated image that someone had created, and it got put on a social media account run by the White House.
BBC said this:
“The New York State Catholic Conference accused Trump of mocking the faith. The post comes days after he joked to reporters: “I’d like to be Pope.”
“Trump is not the first president to be accused of making a mockery of the Catholic faith. Former US President Joe Biden caused outrage a year ago when he made the sign of the cross at a pro-abortion access rally in Tampa, Florida.”
If they bubba’s can afford them!
Howdy Lone Wolf Correct, some folks saw the AI Pope Picture on Truth Social. The President posted the picture of himself there on his own account. He calls leaders of other countries names and all sorts of stuff on his truth social account. Then the media runs with it. Pretty Funny stuff…..
Debt,
Just part of the “Art of the Deal’…..way over the head of anyone here.
Certainly mine….probably why I have TDS so bad?
I don’t think Powell will cave. He knows the president has power but is transitory in any event, and honestly might feel good to stand up to executive branch. The greater danger is employment numbers turn and then a decision will need to be made but nothing right now. The knock on affects of a full blown tariff war could create that but nobody has the crystal ball for that and doesn’t feel like they have the stomach for it. “It’s Biden fault” only plays with a certain audience and only for so long. Americans need Netflix and bag of Cheetos to remain in comfort city and should those go away it won’t be a good 2026 cycle for GOP.
Trump is a real estate guy. He throws a lot of bullsh*t around, hoping someone will buy it, and if nobody buys it, he backs off to try to get what he really wants. He likes to make deals. Unlike his first term, he has picked some decent advisers, no doubt a result of the influence of Susie Wiles. Trump will continue to push for low rates, knowing full well, that Powell will ignore him and despite Bessent telling him what’s what. Bessent clearly had “the talk” with Trump about how lower short term rates could easily lead to higher long term rates. But Trump likes to bullsh*t.
I voted for him, and have no regrets. Despite his faults, he is a patriot, likes his job, is entertaining, and curiously often right about stuff when everyone says he would be wrong. I seriously hope he is wrong about wanting to lower interest rates, but that is mainly because I like to get 4.3% on T-bills, interest being state tax-free. But also because the Fed is only going to lower the Fed Funds Rate if inflation and/or the unemployment are increasing a lot, neither of which would be good for our country.
> “he is a patriot”
Patriots respect the Constitution.
If you study the 250 years of our country’s history nothing his is doing is really different. The back and forth between the three branches is quite normal.
oh give it a rest. both parties pretend to respect the constitution, but are happy to disregard it when it suits them. don’t pretend that the dems show fealty to the constitution while the current president doesn’t.
History is not your strong suit.
There’s bending it a little, then there’s egregious violations.
But then my other reply to you could be: oh ok, then let’s just forget about the Constitution entirely, since you say we’re all just pretending. Right? Right?
700,
Probably isn’t Armani, either…….
marvin, yes you’re right. reading the second amendment out of the constitution, seizing landlords’ apartments during the cdc eviction moratorium for several years, and implementing racial discrimination as long as whites are the victims is pretty egregious.
✔️, and the rule of law.
his biggest problem is that he takes popular goals and screws them up by going about it using unpopular means.
People are overly sensitive. I do recognize this, so I often deal with adults with child gloves even though the have much more important job titles and make more money than I do. Trump doesn’t care about people’s feelings on the other side. I can only imagine how effective he would be if his deliverance was more accommodating.
i agree with that fully.
By T’s own books, he’s a bully. He hits harder and harder until he gets what he wants. Now he’s the 800lb gorilla. He’s a win-lose kind of guy and that will cause problems in the long term, not that anybody seems to care about that.
Fun anecdote: my wife is an avid Temu shopper. She buys stuff that are generally household staples. One of the things she buys from there are doggy poop bags that our city requires (farm life has its benefits). Temu for the first time says they are “out of stock”. She would buy a box that would last for 3 months for a little under $3. She went to Petco, which doesn’t sell that big a box, and the biggest they had was $18! She was shocked, and bought a small box for $7 hoping “this tariff nonsense will go away”. Now that’s inflation! And it’s inflation that might not show up in the numbers, because Petco probably buys the exact same bags from the exact same manufacturer for $1/box, and if the price goes up to $2.50, they can eat the tariff at $18. But us buyers suddenly have to hand over our money to enrich Petco shareholders instead of ourselves.
You can get a 1000 count at Amazon for
$20. I hope that would last you more than 3 months
To be specific, it was a 1000 count. My wife gave bundles to the kids and neighbors.
> “… us buyers suddenly have to hand over our money to enrich Petco shareholders instead of ourselves.”
Best argument I have heard for diversifying into being a shareholder. If money is flowing in a certain direction, wherever I am, it is no crime to position myself where it is flowing. I tell my students, buy stock in the robot that will eat your job. And in my case, I bought stock instead of a pet, which I regard (with a straight face) as a good trade.
Us farm folk shake our heads at the thought of sending dog poop to the land fill. Tell her to make some homemade cloth ones. It will make the climate apocalypse cult happy. Of course they would prefer you to not own a dog.
I figure 5000 years from now, archaeologists will think we are some kind of dog feces worshiping cult who kept their feces as some sort of talisman.
The vast surge in dog ownership does have global consequences, economic and otherwise. Fortunately folks in the USA, as they rarely do, rapidly changed clean-up habits across the board. If they hadn’t, we would all be walking around with microbe-coated flies on our faces. On my hiking trail, I can always tell when someone didn’t clean up dog waste: flies abound. But I digress.
Surge…are the cats in trouble?
Whenever I walk past a yard with a barking dog, I wonder how that house owner made it out of the Trailer Park. And I hate the noise, but I feel bad for that animal that has not learned to accept its fate of lifelong imprisonment.
Tom,
I was raised rural, too, logging country. We all made illegal septic systems and bought clothes at Sears.
Can’t do either, anymore.
So keep on being the rugged individual that you seem to be…I couldn’t.
No illegal septic system here. Though I do work outdoors.
So there are times there is no “legal” bathroom around.
Amish are “rugged”. I’m a fancy city guy in their eyes.
Kent, I use plastic Walmart and other same grocery bags from other stores. Nice, with loop handles. My dog is OK with that!
And often they collect those bags right outside the entrance or exit for a tidy pick up.
The MCT decomposition is interesting and suggests housing has never driven inflation since 2020. Instead, services ex housing has been the driver. Housing even deflated between May 2020 and May 2021, bottoming at -0.36% in Nov 2020.
Since mid-2020, housing inflation rate never exceeded services, and services has never been negative. Services peaked at 1.68% in Feb 2022 and, since hitting 0.48% in Jun 2024, has risen.
Looks like Nov 2024 was an inflection point where the components all turned back toward increase.
Now, what could have happened in Nov 2024 to return the economy to inflation?
Find it a bit hard to believe that housing inflation never exceeded services inflation (ex-housing).
Ex-housing, what major service component is left to drive inflation – healthcare?
HC inflation may have been bad – but worse than housing?
Is there a breakdown pinpointing *which* services were the inflationary driver then?
Also, it might help if you were to post a year-by-year breakdown of inflation (from your source) of the annual inflation (by component) from 2020-2024.
Without doing an in-depth investigation, it is just hard to see that anything other than housing (by *far* the biggest component of services spending) is responsible for the 2021-2024 inflationary insanity.
Rents and SFH prices have clearly exploded.
I was in my computer store yesterday to purchase a Win 11 machine and asked when the Tariffs were hitting them. Every PC in there is manufactured in China. He told me the tariffs had already hit and they were absorbing the price increases to a large extent. Only $50 so far was added due to the tariffs.
You go to a STORE to buy a computer? Oh my goodness! They still exist? You’re begging to get ripped off. You’re begging to get lied to. Why don’t you shop online? Endless choices and price competition from all brands, all models, all configurations, all retailers and direct. I have not bought a computer in a store since the 1984. And I’ve bought lots computers, from cheap laptops to servers, and related equipment, over the years. Don’t come crying to me when you’re still buying at a store and get ripped off.
Personally, I find it nice to hear that there are still some physical computer stores out there and that some people still purchase from them.
Great. Just don’t complain that you’re getting ripped off. You’re ASKING to get ripped off. That was the point.
there’s one exception. microcenter. they have great, knowledgeable employees and prices are competitive with the online retailers, and often even cheaper.
but they have very few locations, so many people in america don’t live near one.
Wolf,
You won’t hear me crying.
I’ve bought all my computers from Microcenter over the years. I never got ripped off. In fact, they have given me great deals over and over again. When my computers failed they had the equipment repaired and I paid for it and wrote it off as a business expense. I go back there over and over again.
They have stores here in Rockville Maryland and Northern VA and they have a loyal clientele. On one occasion the mother board failed and I almost lost all the data, which I had not backed up. The Win 10 machine was repaired (replaced mother board) and is back up running and making me money for my businesses.
I stay away from big box retailers like Best Buy and Staples.
I am a computer nurd who started out with the Apple IIe and CPM operating system. I’ve owned over 20 computers since then.
I buy use peripheral equipment on Ebay to keep some of my older machines running way beyond their useful life.
No way Powell morphs into anything resembling Volker and his integrity.
Volker’s Fed Funds rate made it to 20%. That’s what honest integrity looks like.
“Under Paul Volcker’s leadership of the Federal Reserve (1979-1987), the federal funds rate peaked at a historic high of 20.06% in January 1981. This aggressive monetary tightening was part of a strategy to curb soaring inflation during that period.”
Check inflation in the late 1970s and early 1980s. CPI hit 15%. It stayed above 10% for four years, from 1979 through 1981. Equating that inflation rate to today’s inflation rate is ignorant BS. Equating Fed policy rates at that time and today’s policy rate is ignorant BS. Volcker’s rate hikes destroyed the economy and crushed people that were getting out of school at the time (me) with 10% unemployment, with companies blowing up left and right because they couldn’t roll over their debts due to very high interest rates. And still inflation stayed higher for another decade, between 2.5% and 6%, long after Volcker was gone. People need to quit romanticizing the period.
Howdy Youngins. READ the above Lone Wolf post and learn your history. Don t believe double digit interest rates could happen again?
Correct, but I would argue that Volcker had no choice. Interest rate were being set by the bond market. As you have said on many occasions, there will be plenty of buyers of bonds, for the right rate of return…
During this same period our government relinquished control on the price of a barrel of oil. I worked in refining during this period and saw the corporation give us a 75 cent an hour raise after fighting the union over a nickel. It was also the time when people like me could open an IRA. This IRA grew substantial with the high interest rates. I don’t keep records but memory has served me well. So anyone with correct data is welcome to comment.
I feel your pain Wolf, but many people in fixed income instruments were crushed by inflation far above their rates of return back then.
Financial losses that were never recouped, not unlike the evilly lower interest rates of recent times.
I did very well during that period as I started working at the Defense Department in 1982. Reagan increased the Defense budget and I got all the benefits of the gravy train that resulted. The inflation and high interest rates were just a minor inconvenience. My family cut back our standard of living and made it through that period w/o much problem.
Compare to the chaos since 9/11 here in the Swamp, those were the glory days.
I thought you hated Government workers? I guess you’re just one of those “pull up the ladder” old guys, eh?
“For connoisseurs of misery, the ten years from 1973 through 1982 are a feast of low points. The rate of economic growth was one of the worst for any comparable period since the end of World War II. The country endured one of the worst periods of inflation in American history, and foreign investors fled the dollar as if it were the Mexican peso.”
You’re not the only one who wouldn’t want to go back to 1981. Ugh.
Yes.
Yes, it’s now our summer of 1978. This time with massive debt…
Interesting times.
Howdy WB. Notice how quite it is at CONgress?? If they bust the budget again, look out above. Inflation and high interest rates are coming NO matter how good the trade deals are for the US………..
I’ve seen no will in Congress under either party to start responsibly doing its job. That would also, IMO, have included, alongside fiscal matters, immigration, tariffs (actually in its taxation wheelhouse), and other areas, thereby dumping matters into the laps of successive quirky presidents. We are well into that quagmire.
On and on it goes, as the people banter about whatever serves the two parties in defining their differences. They never do the needful things, and we never pay attention long enough to make them. The people need to vote out every incumbent in Congress and keep doing that until Congress imposes its own limits.
Phleep, to put action to those words — the tough choices — they’d simply be voted out. Pin this on the electorate, not the elected. Of course, the electorate would need to actually have a pretty solid understanding of economics, and, well, that ain’t happenin’…
The distributed lag effect of monetary flows, the volume and velocity of money, accelerates between now and September. Other things equal, September should be a good time to buy bonds.
1) the trade deficit cut a record 4.83 percentage points from GDP last quarter
2) Treasury expects to borrow $514 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $850 billion
Where’s the slowdown?
Ford puts a number on its hit from Trump’s tariffs and halts guidance
Yes, exactly what I’ve been saying for months: companies have to eat the tariffs because they cannot raise prices because consumers have had it with high prices, and sales would plunge if companies raised prices any further. GM already said the same thing, as did other companies.
But in 2021 and 2022, these companies jacked up their prices, and their profit margins ballooned, and they made out like bandits, so now they’re at their ceiling with prices, and they’ve got some taxes to pay.
I am in the rare minority with expecting 125 basis point in fed fund hikes before June 2026. I think the lockdown at the border with keep the unemployment rate low and I expect the inflation to be up. if Trump actually deports large numbers of foreign workers in the next year. We will have a perfect storm creating Fed hikes to battle their mandates and real asset deflation. Wage growth is real in my experience, inflation has fuel in place to rise!!
I doubt it. Home prices and therefore imputed rent will be falling soon. That’s a major downward pressure on inflation measures. Should be kicking in within a few months. And QT continues.
Not unlike the fuel surcharges of the past, tariff price increases will stick around as profit once the tariff is removed.
Mw: Dow falls over 300 points, S&P 500 and Nasdaq slide as Fed starts 2-day meeting
Need to get my son down to visit Alcatraz before more inflation hits and the only way to visit is to be inmate or guard.
Is there enough good bedrock on that island to build a big tower…..or maybe a palace?
Wasn’t that great American Entreprenieur Al Capone an occupant of that sacred property?
I just hope my order from Real Doll doesn’t get caught up in this tariff war. With the optional internal skeleton she’s 11K! I don’t need 30 dolls under the tree.. just her.
“Lars and the Real Girl”
Fun movie, 2007.
Maybe technology has advanced a little by now. Maybe at least she can talk some AI stuff and blink her eyes meaningfully.
Good, rates can stay where they are or go higher. Lower rates are unhealthy for the economy, and encourage excessive borrowing.
Inflation will persist. Even in a best case scenario for another few years. And that best case scenario involves unlikely things like repealing the inflation causation act and co trees cutting spending back to real 2019 per capita levels.
It’s extremely difficult to get ahead of the continued price increases in input costs like electricity and especially insurance. Insurance is on a multi year hiking cycle with no near term end.