Core services inflation is the biggie, and it’s going the wrong way. The Fed is already talking down the pace of rate cuts.
By Wolf Richter for WOLF STREET.
Inflation has been in services and is still in services, it has become sticky in services, and recently it has been re-accelerating in services. Services dominate consumer spending. And durable goods prices rose for the second month in a row, after big drops. But gasoline prices continued to plunge, and food prices ticked up just a little, according to the PCE price index by the Bureau of Economic Analysis today. This is the data the Fed prioritizes as yardstick for its 2% inflation target.
Three of the four major metrics accelerated in October even on a year-over-year basis: the overall PCE price index to +2.3% (blue), the “Core” PCE price index to +2.8%, (red), and the “Core Services” PCE price index to +3.9% (gold), while the durable goods PCE Price index started rising from the ashes and became less negative (green).
The Fed has already been talking down the pace of future rate cuts recently, including in the meeting minutes yesterday and in speeches by Fed governors.
The driver: “Core Services.” The PCE price index for “core Services” accelerated to +4.4% annualized in October from September (+0.36% not annualized), the sharpest increase since March (blue in the chart below). The three-month core services index accelerated to 3.8% annualized (red).
Core services include housing, healthcare, financial services & insurance, transportation services, non-energy utilities, communication services, recreation services, food services & accommodation, and “other” services. But it excludes energy services, such as electricity to the home.
Year-over-year, core services PCE price index accelerated to 3.9%, the fastest increase since May. There has essentially been no progress since May:
The “core” PCE price index accelerated to +3.3% annualized in October from September (+0.27% not annualized), the biggest month-to-month increase since March.
This month-to-month acceleration was driven by the jump in the core services PCE price index (see above).
The “core” index attempts to show underlying inflation by excluding the components of food and energy as they can jump and drop with commodity prices.
The 3-month core PCE price index accelerated to +2.80% annualized, the third acceleration in a row, and the fastest increase since April (red).
The 6-month core PCE price index accelerated to +2.34% annualized (red), and has remained higher all year than it had been at the end of last year:
The durable goods PCE price index increased by 0.7% annualized (+0.06% not annualized) in October from September, on top of the big jump in August, which had been the biggest increase in two years, after a series of steep negative readings (deflation).
In October, the month-to-month increase was due to motor vehicles, while prices fell for household furnishings & appliances, recreational goods & vehicles, and “other” durable goods.
As a result, the 6-month index became less negative (-1.8%, red line).
And the year-over-year index also became less negative, see green line in first chart at the top (-1.6%).
In recent decades, durable goods prices trended lower on average due to manufacturing efficiencies, technological improvements, and offshoring production to cheap countries (globalization). Over these decades, the driving force in inflation has been services. During the pandemic, durable goods prices spiked due to the sudden demand fueled by massive economic stimulus that made consumers suddenly willing to pay whatever for goods, and there was huge demand for goods, overwhelming supply chains, giving companies enormous pricing power, and they used that pricing power:
The overall PCE price index, which includes the food and energy components, rose by 2.3% year-over-year in October, an acceleration from September (+2.1%), despite the plunge in gasoline and other energy prices of -12.4% year-over-year and -1.0% month-to-month (not annualized).
Food and energy prices make up the difference between the overall PCE price index (blue) and the core PCE Price index (red). The price spikes of food and energy in 2021-2022 caused the overall PCE Price index to shoot to +7%, while the core PCE price index, which tracks the underlying inflation beyond commodities prices, topped out at 5.5%.
As energy prices have been plunging starting in mid-2022, the overall PCE price index decelerated faster than the core PCE Price index, leaving the core PCE price index with a higher rate.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
What are your thoughts on Scott Bessent?
Scott is good friends with George and Alex Soros and with King Chucky and his wife Cami in the UK and lives in a big pink house in Charleston, SC. What more do you need to know about Scott?
With sticky service inflation and the new administration’s tax on global durable goods, food and energy we may see some eye popping numbers down the road.
The tariffs will only apply to imported goods so food, energy, and anything manufactured here should not change in price.
I read today that the EU tax on imported US autos is 10% while the opposite is only 2.5%. I’d be happy to listen to anyone explain to me why that’s ok. Every tax and tariff should be at least equal to the same thing going the other way.
Here is a reality check. Next year, 10 Trillion in US Federal debt will roll over.
40% of that was formally being serviced at below 2% rates, which will now double, sending servicing costs spiking…
So, what can bring the inflation from services down? I will say a massive unemployment, which forces customers to spend less. When customer spending goes down, the demand (on discretionary) also goes down.
When there is less discretionary demand, business owners need to bring down the cost to attract customers.
I don’t have any background knowledge in Economics, so feel free to correct me.
“So, what can bring the inflation from services down? I will say a massive unemployment, which forces customers to spend less. ”
In the past, that has worked. But “massive unemployment” is also exactly what the Fed was trying to avoid.
I came out of grad school in 1981 during the “double-dip” recession when the unemployment rate was 8% and heading to over 10%, as Volcker crushed inflation with double-digit interest rates. And the unemployment rate stayed above 7% for 5 years. It ruined that part of my life. I don’t wish that on anyone.
Today, for many young people who are just starting out, “massive unemployment” is the worst thing that can happen to them – for years to come. In my experience, the Fed was right to not forget its second mandate and back off before triggering this “massive unemployment.” Inflation won’t go away, it’ll be moderate rather than low, interest rates will be quite a bit higher than before Covid, they’ll be normal like in the 1990s, and people will get used to 6%-8% mortgage rates, and home prices will reflect that, but at least young people will have a chance to start building their careers.
Wolf, I def understand and see your point.
Today current economic environment is unique after covid, and before ultra low Interest rates for 10-15 years
Today current economic environment is unique after covid, and before ultra low Interest rates for 10-15 years, and currently hitorical low unemployment rate. Even the Euro Zone with low to negative gdp growth and high inflation has low unemployment rates .
I replied above earlier on my phone, for some reason it did not post the whole comment.
What i also meant to say was that before the September Cut, the Fed Funds Rate has proven Not To be Restrictive to the Economy, and currently right now is still Not Restrictive…… , so they haven’t backed off of anything….
My worry is that we will follow Argentina’s prior
path of inflation with the currency no longer
considered a store of value. How many decades
did Argentina go down that path ?
Argentina has always gone down that path. That’s the only path it knows.
Wolf: You have mentioned before how that recession ruined your life. You could look at it in that manner but it comes off as a negative commentary that is somewhat unbecoming of you.
That period is how you got to here and by here I mean you are nationally recognized as an authority figure, and highly respected by a great number of people.
I know lots of highly successful people and with the exception of inherited wealth, they became that way due to really difficult times early in their lives. Something to think about.
I never said “it ruined my life.”
What I said is: “It ruined that part of my life.”
5 years of it. So re-read that thing. I’ve said this many times here before.
I had a freshly minted Master’s degree, no money, no job, and had to make do. I didn’t have parents, and there was no one to move in with. I worked at Taco Bueno for a while, then taught ESL as an instructor for a while, that kind of thing. That’s not what I expected to be doing at that stage in my life. So three years, part of it in abject poverty, a fight for survival. Then I went back to school to get my MBA in finance. During those 2 years, at first, I worked at night part-time as data entry clerk (more abject poverty), then started teaching at the business school while getting my MBA, and at that point, my second year in B-school, things started turning around. That “part of my life” was 5 years, thank you Volcker. I was young, invincible, indestructible, invulnerable, and immortal, and lived through it. But I don’t wish this on anyone. Monetary policy can blow things up.
I’m glad Volcker got inflation under control, but he’s no hero in my book. It was brutal. Lots of small and not so small businesses went under, and their owners got crushed. There was a lot of hardship.
“Something to think about.”
@Louie
I’m thinking about what a pompous prisspot you are. My family, friends and I also suffered in the early 80s and Wolf was saying something important. You didn’t even read him correctly, so intent were you on scolding and lecturing.
Is it possible to break out the components of “Core Services” to see where the pressure is coming from or are they all going up together?
Sure and I did that in the past, but each item is so volatile that it breaks your neck.
If you want to see the details of services inflation, I cover that in the CPI articles. That’s our actual and main inflation index. We only look at PCE because the Fed uses it. The PCE index is broader and covers some non-consumer items. But the data is similar.
Here is CPI for October:
https://wolfstreet.com/2024/11/13/beneath-the-skin-of-cpi-inflation-overall-cpi-accelerated-for-4th-month-core-cpi-for-3rd-month-on-re-spiking-used-vehicle-prices-rising-homeowner-costs/
Today in the PCE, the month-to-month drivers were the acceleration in housing (+0.37%), non-energy utilities (+0.49%), transportation services (+0.62%), food services (+0.34%), and financial services (+0.89%).
In the world economy, the players are not only lead by the American team but dominated by its conditions. As in 1929, when New York tanked, the world did also. Today, almost in 2025, the same holds true.
Inflation has one bright spot: gasoline. World prices for crude oil are holding steady and there are enough refineries to efficiently process what comes out of the ground. With the recent election of Trump and his “drill, baby, drill” policy, gas prices should stay modest for the succeeding 4 years.
The Russia-Ukraine war has almost no effect on the world economy. Russia is frozen out of Western markets, but has found alternative buyers in the Third World, and Ukraine is a negligible factor in the world except in wheat. Inflation in services, at any rate, is a domestic matter as services are usually performed locally by chain businesses.
“With the recent election of Trump and his “drill, baby, drill” policy, gas prices should stay modest for the succeeding 4 years.”
🤣 the US frackers have been drill-baby-drill for years as the US became the largest producer of natural gas, crude oil, and petroleum products in the world, and also the largest LNG exporter in the world. Their overproduction has caused the price of natural gas to collapse years ago, and starting in 2014, they managed to crash the price of crude oil for two years, triggering what I called the Great American Oil Bust, and in 2020, in the huge glut at the time, WTI futures went negative even. Drill baby drill, crash those prices, is what they’ve been doing for years, and my site is full of stories about it. Would be kind of fun to start writing about the Great American Oil Bust of 2026-2028 again?
If the Fed does its job, we should start to see an amelioration in services inflation within the next 3-5 business quarters, as there is a correlation between core durable goods inflation and services inflation.
We got a new correlation fantasy theory here? But there is near-zero correlation between durable goods and core services. Durables goods have largely been in DEFLATION over the past 40 years, while core services have powered inflation.
Just a bit of Noise or the start of an upwards trend? That’s the interesting question. Obviously if Trump sticks to his guns AND the inflation genie hasn’t been forced back into the bottle things may get unpleasant.
Things have been unpleasant for several years. It’s more of a continuation – the fed is dragging this out – “we’ll get farther if we go slower”
MW: Trump could save $1.4 trillion in cutting federal spending just by nixing Biden era executive orders
Happy Turkey Day Wolf and thanks to you for keeping us accurately informed of what’s REALLY happening in our economy.
Special thanks to all the commenters here as well. It’s as much fun to read the often intelligent and sometimes crazy, off the wall comments, as it is to read the articles!!!
Agree, happy Thanksgiving, and safe travell!
Tariffs will increase goods inflation. Driving low-wage labor out of the US by deporting illegals will increase services inflation, and food inflation. However, it might lower rents on sh*t rental units. Raising the govt debt to bazillions will increase interest rates. It is all okay with me. I like getting 5% risk-free and state income tax free for spending less than an hour a week in my Schwab account.
Affiliated with a healthcare org that just handed out guaranteed raises to nurses of 10%, 8% and 7% over the next three years.
Services inflation isn’t going anywhere. The next day they were all discussing spending the new raises on vacations, dining, hair appointments etc. Not to mention the increased fee the org will charge as a pass thru of higher personnel costs.
“I didn’t have parents,”
This helps explain my admiration of Wolf Richter
To have a fire in your belly you need to have your back against the wall.