Housing costs jumped. Stubbornly high housing inflation has frustrated Powell for a long time.
By Wolf Richter for WOLF STREET.
The “Core” PCE price index, the Fed’s primary yardstick for its 2% inflation target, rose by 2.7% from a year ago in August, the second slight acceleration in a row, and the biggest increase since April (red in the chart below). This “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 overall PCE price index, which includes the food and energy components, rose by 2.2% year-over-year in August, a deceleration, on plunging energy prices (-10.1%) and slower rising food prices (+1.1%).
The “core services” PCE price index increased by 3.8% in August year-over-year, the first acceleration since March, on accelerating housing costs (yellow). The durable goods PCE price index fell less than in the prior months, in August by -2.2% year-over-year, the smallest drop since April (green):
The month-to-month moves.
The “core” PCE price index rose by 1.6% annualized in August from July (not annualized, +0.13%), a deceleration from July (blue in the chart below).
Within it, two forces – core services and durable goods – pulled in opposite directions as durable goods prices continue to deflate from the pandemic spike.
The six-month annualized core PCE price index, which irons out the month-to-month squiggles and includes all revisions, decelerated to 2.4% annualized (red):
The “core Services” PCE price index rose by 2.8% annualized in August from July (+0.23% not annualized), second deceleration in a row.
The six-month core services index rose by 3.3% annualized (+0.27% not annualized), the first acceleration since April.
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, jumped by 5.7% annualized in August from July (+0.47% not annualized), the second month in a row of sharp acceleration.
The six-month index rose by 4.9% annualized, the first acceleration all year.
Year-over-year, the housing costs PCE price index accelerated for the first time since April 2023, rising by 5.3%. Stubbornly high housing inflation – which has remained high against all predictions – has long frustrated Powell.
Durable goods PCE price index fell in August from July by 2.9% annualized (-0.24% not annualized). The six-month index also fell by 2.9% annualized.
Durable goods include motor vehicles, recreational goods and vehicles, appliances, electronics, furniture, etc.
The 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. But during the pandemic, durable goods prices spiked massively due to the sudden demand fueled by the stimulus funds, and that exaggerated demand hit tangled-up supply chains. The resulting shortages and consumers suddenly willing to pay whatever gave companies enormous pricing power. So now, the PCE price index for durable goods is roughly back to normal:
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Well that put the brakes on the drop in t bill rates.
When NVDA reaches 150 I may buy coffee farm from you
Then I will employee cheap labor (and hopefully eventually robot slaves) to farm my coffee trees
How easy is it to do the farming? I think it must be easy No?
Protect your wealth Coinhuskers best prices in USA
Looks like we’re definitely back to bad news is good news and good news is also good news kind of mood in WS judging by how the market is rally hard today and once again back to all time high. Guess that .50 basis cut really set ingrain in their head, cut is only direction it can go from now on no matter what..
As for the FED, have fun with this data, if they truly care about inflation, then they will soon realize they are looking at a F around and find out moment cutting that much while we’re not at target. That’s assuming they truly care, if not then this data probably won’t change influence them to pause next meeting or even hike.
“Looks like we’re definitely back to bad news is good news and good news is also good news kind of mood in WS judging by how the market is rally hard today and once again back to all time high”
Haha. That’s exactly what it is. We are in an eternal bull cycle, which is feeding the inflation.
The core services inflation is the actual inflation most people feel and should be the yard stick, as it is the one which people spend most their income on and is not subject to “hedonic adjustments”.
Thanks FED and rep and dem govts for this valuable gift made with a gargantuan balance sheet and ever increasing budget deficits. That’s exactly what we needed.
SP500 & Nasdaq in red after the news.
SP and Nasdaq are basically flat. Dow and Russell up modestly. All the indexes came roaring out of the gate this morning but lost steam.
Sometimes new drivers or older people accidentally stomp on the gas instead of the brakes. That’s how you end up seeing cars driven through the front of restaurants or plate glass windows at strip malls.
Anyway, as inflation moves back towards 3% not 2% Powell needs to stop on one of those pedals. I would have thought this called for the brake pedal but what do I know.
It amazing the polar opposite headlines over at CNBC, looking at the same data. I’ll go with Wolf’s take, yes inflation is going back up. We are supposed to believe that Powell is unaware that giving a home loan to anyone with a pulse drives up home prices? I don’t think so. We have seen this movie before…
Hedge accordingly.
I would instead say:
“Fed Favored Annual Core PCE Price Index Growth Decelerates to 2.7%”
Still thinking how my brain did what it did. Maybe because FEDs preferred gauge is PCE, not core PCE? I should read stuff more carefully.
“the personal consumption expenditures price index
The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps”
It ACCELERATED from a 2.6% increase in July to a 2.7% increase in August. It increased at a faster rate in August than in July.
I passed a remodeled home on the SF Peninsula yesterday with a for sale sign and went to Zillow to see what they were selling it for. The 3 bed 3
bath 1,785sf home just had a $100K “price cut” but is still over $2.5mm Zillow has an “estimated monthly payment” of over $16K. Since you can’t just like and tell the bank you make over $1mm a year (like you could in 2005) you are going to need more than a “pulse” to get a loan to buy a home today with the still crazy high Bay Area prices.
Funny, maybe not quite at $2.5M level but here in SoCal, particularly in OC like Placentia, Irvine, Ladera Ranch and all the way to Long Beach, I regularly see houses listed for $1M+, nothing big or fancy still getting sold…so either people are all making Sr Director/VP level salary or the bank is somehow still lending to them….guess $6k -$7K is not a big deal to many people…wonder how this picture will end…
Mr Wolf I have a question… FT writes “Federal Reserve’s preferred inflation measure falls more than expected to 2.2%”
I read your article so don’t flame me I am just stupid. You wrote that inflation measures rose but FT wrote this morning they fell.
Is FT talking about the durable goods that you mentioned decreased 2.2%? They don’t really explain it much in their article, whereas you have details that my dumb non-AI brain cannot parse
Pls no flame just educate this mega dummy :]
You’re just gonna hafta actually “read” the first 3 paragraphs because they’ll tellya ixactly, and also look at the #1 chart.
Hint: If the FT actually said that, it’s wrong. The preferred inflation measure of the Fed is NOT the overall PCE price index, but the “core PCE price index,” the measuring stick for its inflation target. And everyone knows that, except the FT? And now re-read (= actually read) the first three paragraphs. Good luck gnawing our way through them.
I’m not the person who asked the question, but I can confirm that the FT’s *headline* is, word for word, what Anonymous said it was. The story itself is behind a paywall, though, and I’m not about to pay to find out why and how the FT is wrong. :)
That’s OK. A Yahoo Finance story today about Florida real estate claims gives other examples, including:
“Fort Wayne, Indiana: With median listing prices 102% below the national average, Fort Wayne offers an affordable entry point. Recent price dips could spell opportunity for long-term investors.”
Sounds like a good deal; a free house + 2% walking around money.
“Journalists” and numbers almost invariably do not get along well. Or we could blame AI.
Potential silver lining. Would be high housing costs in some way deflationary? If renters and mortgage payers and new prospective buyers not spend money on other things?
The idea is that housing cost IMO does not act as a (strong) positive inflation feedback. As oppose to e.g. energy. Housing should not much increase durable and non durable goods, salaries, even other services e.g. car insurance.
That’s a funny twist.
Sharply rising housing costs are always inflationary and they entail a lot of services that also go up. There are two factors to it: one small one, and one big one:
The small one: High housing costs shift some spending to housing from other things. So maybe some recent buyers/renters will wait for a while longer to replace their car. And that has already been occurring. But it’s just a relatively small number of people who recently bought, and renters who’re strung out (not the renters of choice that just about every new building has been targeting for the past decade).
The big one: There are many more people that benefit from surging home prices. 65% of households are homeowners, and most of them bought their homes a while ago, not recently, and they’re loving the price spike, and they’re spending part of it (home = ATM with big fees). And the 10 million or so mom-and-pop landlords benefit not only from higher home prices, but also from rising rents, and they’re going to spend some of it too. So, like I said, rising housing costs are very inflationary. No way around it. Which is why the Fed is so frustrated with them.
So frustrated with them…yeah perhaps a case of buye’s remorse after helping with getting mortgage down to lowest in history and to buy up MBS like nobody’s business..all for what? Because people weren’t temporarily buying houses during a lock down when the whole world was standing still…and now to be frustrated and still pointing to only supply as the cause for stubborn high housing cost…
Man, whatever positive thing people will write about Pow Pow well into the future…let’s not forget this as part of his legacy in the footnote.
BREAKING: Arsonist “Frustrated” By Fire’s Persistence, Sources Say
You said it much better than I tried to, not wordy and still to my point…
Btw, I got the world’s smallest violin for Pow Pow, arsonist needs love too when they are frustrated…
@Biker,
It amazes me how many people take on loans on their home equity, some to the very hilt every few years. Loans are money creation, and that is inflationary.
Why does a price index have a % as the y axis?
Because it measures inflation = “rate of change.”
Prices are a “level.”
I also publish-price level indices, in addition to rate-of-change indices, but not for the PCE data (because it’s kind of irrelevant because the only reason we look at PCE is because the Fed uses it). I publish them for the CPI data, which is the main index we have. you can get the price-level-indices here, including by detailed category, such as “used vehicle CPI”:
https://wolfstreet.com/2024/09/11/beneath-the-skin-of-cpi-inflation-core-cpi-again-accelerates-month-to-month-fueled-by-hot-core-services-cpi-durable-goods-prices-drop-further/
Powell is frustrated…
Powell took a dump right in the middle of the street, a 50 basis dump. Now the flies are coming out, to feast on his crap offering.
But in all honesty his job is impossible, he’s just swinging in the dark hoping he gets lucky…. the noble chair-man.
I can see it in my head, picturing Pow Pow staring at a poster of Volckler, hoping to be remember as the one that conquer inflation just like his hero, without falling in the same trap as his hero did…
As these numbers are starting to trickle out and inflation is heading back up….Pow Pow can imagine Vockler looking at him with contempt..
My guess is that pretty soon, Powell will come out and say inflation is transitory, both in up and down directions. (All FED bankers will cheer for him at that meeting)
Then he will be eligible for a Nobel Prize for figuring out inflation is transitory in BOTH DIRECTIONS!
Powell’s legacy will be transitory inflation that caused the largest wealth divide in the history of the country.
Bullshit ,they printmoney inflation up,they remove money inflation down . Interest rates up inflation down ,easy peasy . THERE NUTS ARE IN A VISE .
WSJ headline today:
“Fed’s Preferred Inflation Gauge Cooled in August…The PCE index rose 2.2% from a year earlier, below expectations.”
Why?
“Why” is the WSJ posting bullshit headlines to manipulate people? I dunno. Ask them. But they do.
“Fed’s Preferred Inflation Gauge Cooled in August” is bullshit. It’s just wrong. The Fed’s preferred inflation index is the “core PCE price index” which accelerated to 2.7% today. This is the Fed’s yardstick for its 2% inflation target.
The overall PCE price index is what decelerated to 2.2% (energy costs plunged, food rose slowly)
RTGDFA.
OK, we’ve established that the WSJ and FT are wrong. Just in case anybody is compiling a list of headlines today that are wrong, here’s another one:
Yahoo! Finance “Dow gains, Nasdaq falls as Fed’s favored inflation gauge cools”
Fed blurb from October 2014 fyi:
“ Residual seasonality for market-based core PCE price inflation in the second three months of the year also becomes negligible in the current-vintage data. However, even in the current-vintage data, market-based core PCE inflation is typically about 1/4 percentage point lower than average in the second half of the year. All told, based on both initial and revised estimates, core and market-based core PCE inflation tend to be higher than average in the first half of the year, and lower than average in the second half of the year.”
It is going to be VERY noisy October with the next Fed meeting not until after the Election Day and plenty of economic figures to be reported (and revised). Expect plenty more stupid headlines and spins from the media.
It might be a good time to find a good book to read or take that outback camping expedition out of range of any cell towers.
I wonder which candidate the black swans are voting for?
YoY housing PCE has not been <5% in at least two years. Ouch.
That's what entrenched inflation looks like.
“This inflation is transitory”
They have no idea what’ll happen.
I expect they’re worried about recession, but then we also still have some inflation.
My gut says inflationary forces die hard when everyone has been programmed to ignore risks and expect bailouts/easy money for almost 15 years.
Are we just seeing the wilfully blind running for the cliff edge?
Well, that’s one hell of a long run way to the cliff…we have been seeing the willfully blind running towards the cliff edge, either the blind chasing after housing, stock, Crypto and so far the only people fell off the cliff edge or looking like the fools for the most part are the cautious one staying on the side line…exception to this are maybe Gamestop APEs, SPAC chasers…etc
Maybe need to suck it up and accept this is the new F up reality and for the cautious to throw in the towel…
Re: fuel prices. Can there be a recession with oil, an input to everything, under 70$? Since auto gas use is relatively inflexible, a price drop frees up money to be spent on stuff that is discretionary.
The Fed and our immigration policy has conquered wage inflation, so now it’s full speed ahead.