The YoY “core” PCE price index, the Fed’s yardstick for its 2% target, rose 2.65%, with no progress over the past 5 months. But energy prices plunged.
By Wolf Richter for WOLF STREET.
The “core” PCE price index, the Fed’s primary yardstick for its 2% inflation target, rose by 3.1% annualized in September from August (not annualized, +0.254%), the biggest month-to-month increase since April. And August was revised higher (blue in the chart below). This month-to-month acceleration was driven by:
- Core services accelerated to 3.7% annualized (+0.30% not annualized), the biggest increase since April.
- Durable goods flipped from a series of month-to-month declines (negative readings, deflation) to a positive +4.0% annualized, the biggest month-to-month jump in prices since September 2022.
We’re going to look at it on a month-to-month basis (blue), and on a 3-month, 6-month, and 12-month basis (all of them in red) because the developments in recent months get washed out in the 6-month and 12-month indices.
The 3-month core PCE price index accelerated to 2.35% annualized, the second acceleration in a row, and above where it had been in August 2023, with a big spike in the middle (red).
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. We’ll get to the overall index, which includes food and energy, in a moment.
The 6-month core PCE price index decelerated to 2.3% annualized (red). It remains higher than it had been at the end of last year:
The “core Services” PCE price index accelerated to 3.7% annualized in September from August (+0.30% not annualized), the fastest rise since April. And the prior two months were revised higher (blue in the chart below).
Core services include housing, healthcare, financial services & insurance, transportation services, non-energy utilities, communication services, recreation services, food services & accommodation, and “other” services.
The 3-month “core services” PCE price index rose by 3.35%, the second acceleration in a row, and the fastest increase since May, and higher than it had been in October last year:
The 6-month core services PCE price index rose by 3.15% annualized (+0.26% not annualized), the first acceleration since April.
The durable goods PCE price index jumped by 4.0% annualized (+0.33% not annualized) in September from August, the biggest increase since September 2022, after a series of negative readings (deflation) in a row.
Durable goods include motor vehicles, recreational goods and vehicles, appliances, electronics, furniture, and other durable goods.
This sudden increase was driven by price increases in motor vehicles – we have seen this turnaround in motor vehicle prices from sharp drops to significant increases in other data – household furnishings and appliances, and “other” durable goods.
The 6-month index and the 12-month index became less negative, the 6-month index at -2.4% and the 12-month index at -1.9%.
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. During the pandemic, durable goods prices spiked due to the sudden demand fueled by the stimulus funds that made consumers suddenly willing to pay whatever; and that phenomenon met tangled-up supply chains, all of which gave companies enormous pricing power, and they used it:
12-month core PCE price index: No progress for 5 months.
The “Core” PCE price index, rose by 2.65% from a year ago in September, compared to 2.72% in August, 2.66% in July, 2.63% in June, and 2.67% in May, so rising roughly at the same pace for five months in a row, and well above the Fed’s target (red in the chart below). So no progress over the past five months at all.
The “core services” PCE price index rose by 3.7% year-over-year, a deceleration from 3.8% in August, and roughly the same as in July (yellow).
The durable goods PCE price index declined by 1.9% year-over-year, but that was a smaller decline than in the prior months, and the smallest decline since March (green).
The overall PCE price index, which includes the food and energy components, rose by 2.1% year-over-year in September, a deceleration that was driven by the plunge in energy prices (-15.2% year-over-year) and slower rising food prices (+1.2% year-over-year).
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If money flows, the volume and velocity of money, are still in sync with inflation, then August represented a bottom. Next year inflation will be higher.
If the LNG ”pause” ends after the election, I would expect that while this may be good for GDP, it would almost definitely drive natural gas prices up, and with it the overall PCE index.
It’s interesting that the Biden administration mostly focused on using BS arguments from a notably biased researcher to justify the LNG pause for “environmental reasons”, when a more effective approach would have been to talk about how it would drive natural gas prices from extreme lows and closer to those levels seen in the EU ($12) or Asia ($13).
LOL.
1. that pause never paused LNG exports from existing terminals, never was intended to, and LNG exports have continued at a brisk pace, and they’re exporting all that they have customers for.
2. That pause was a pause of approvals of export applications from NEW LNG export terminals, meaning that when those new terminals would come on line, they could not export LNG until the applications would be approved.
3. That pause was struck down by a judge in July, and there is no more pause.
4. You people are funny.
Top headlines at MarketWatch:
“PCE report for September: Inflation data shows price growth moving toward 2%”
“Fed’s preferred inflation gauge moving towards target.”
“Fed can continue rate cuts on PCE data, Weinberg says”
“The Fed has almost hit it 2% inflation target, but it won’t be easy to keep it there”.
Nary a mention of core or core services.
That second quote is blatantly false because the Fed uses CORE PCE not the headline number. Core is up big m/m.
Perhaps we found the floor in durable goods prices.
Looks like it.
We’ve already seen that the US legacy automakers will cut production rather than cut prices. New vehicles are way too expensive, after the huge price increases over the years. And so new vehicle deliveries are below where they’d been 25 years ago, despite population growth. But instead of lowering prices, which would boost sales, automakers rather cut production to keep their fat profit margins intact.
I’m saying this because we have seen that new vehicle prices are very sticky on the way down, and there is a lot of resistance to actual big price cuts (except among EV makers, following Tesla). And used vehicle prices look to have dropped about as far as they’re going to drop, and they have started to rise again. So overall vehicle prices might be about to turn from an inflation tailwind to an inflation headwind, and that will show up in core inflation measures.
Funny how this stickiness is prevalent across major capital assets like housing, if not even more so. New builders are lowering prices but doing so by incentives, rates buy down..etc, and existing home sellers largely still refuse to get the memo yet unless forced so.
For the auto and housing industries, we need some forced action to make them not have any options but to lower prices back down to reality. The Ratchet effect is a real B B. Once it’s anchored it’s probably 1000 times harder to make it go back down than the other way around.
As for this ” So overall vehicle prices might be about to turn from an inflation tailwind to an inflation headwind, and that will show up in core inflation measures.” wait until another one or two rates cut and if we are not in any major recession, people will once again lost their freaking mind and disregard the price because they can once again finance their new ride with 3-4% interest for 84 months…inflation tailwind it is…
“existing home sellers largely still refuse to get the memo yet unless forced so”
And judging by price movement, vanishingly few of them are being forced to.
I did read a couple of articles that say a glut of oil and nat gas will happen over the next 3 to 6 months and maybe longer. Energy prices may plunge more?
Also, just shoot the grain commodities. Wheat, Corn, Soybeans, and rice are basically at 2008 prices and from the charts indicate they are heading lower.
CL 1M closed between Aug close and Sept close. CL completed #13 of its monthly downtrend.
North America already has an effectively infinite supply of gas for the next 50-100 years.
50-100 years supply is a lot, but it is far from “infinite”
How funny….one glance at MSM headline this morning…inflation is meeting expectations. Didn’t read too much into it, knew I have to get the download here instead. Funny how hard MSM is trying hard to sell the next rate cut is less than a month away…
Reading the data here, not so sure if that’s still the case if Pow Pow is truly data dependent, guess we will find out real soon..
It seems to be the main questions are:
Does the current data tell us inflation is increasing or staying the same?
If inflation is starting the same, how bad would it be if it just stayed at 2.7% instead of 2.0%?
I think the answer to the first question is debatable and arguably there just isn’t enough information to say.
The answer to the second is open to a lot of interpretation. During the ZIRP era, there was a lot of talk about increasing the inflation target from 2% to maybe 3 or 4%, because 2% was a little too close to deflation during the Great Recession.
Reasonable questions to debate.
Another proposal was instead of 2% being a de facto ceiling for inflation, maybe we should target a 2% average, so if we undershoot for a while, we can also overshoot for a little bit.
Average PCE inflation for the last 40 years is now sitting at 2.4 percent
That would make Yellen proud. She considered it a career failure to not lift inflation to 2% during her term at the Fed office.
She can now relax…the goal has been achieved with prepaid deposits for a few more years.
I think that the 2% is not a ceiling but the average. But to have the average you need to first go below 2.
Average for 30 years is 2.0%.
“The inflation rate for consumer prices in the United States of America moved over the past 63 years between -0.4% and 13.5%. For 2023, an inflation rate of 4.1% was calculated.
During the observation period from 1960 to 2023, the average inflation rate was 3.8% per year. Overall, the price increase was 945.29%. An item that cost 100 dollars in 1960 costs 1,045.29 dollars at the beginning of 2024.”
Globalization kept it artificially down in the last 30 years.
if you think you can overshoot to make up for undershooting, then we should be undershooting by 12% for a time to make up for the 3 years of 18%. you can’t have it both ways.
It’s funny to take that data and make that conclusion.
Over 63 years: 3.8%
Over the last 30: 2.0%
Therefore:
Over the first 33 (1960-1994): ~6%
Which 30 year period is “natural” and which is “artificial”?
Conventional wisdom says the first period was abnormally high thanks to the oil shock and the failure of the gold standard. This was a time when inflation went from 4% to 13% and back again.
There is no 3 years of 18%.
There is a 3 year period that averaged 4.8%.
That came after a 12 year period that averaged 1.3%.
The combined average of that 15 year period is… You guessed it: 2.0%
patently false.
2021 – 4.7%
2022 – 8.0%
2023 – 4.1%
with compounding, that was 17.7%
1. Saying 3 years of 18% is at the least a little confusing, since people are used to seeing annual numbers.
2. Those are CPI, which averages to 5.6%. PCE was 4.1, 6.5, 3.8, which averages to, let me see, carry the 1….. 4.8%
3. The Fed explicitly targets PCE, which is known to run about 0.5% lower than CPI. In other words the Fed’s real target is about 2.5% per year in CPI.
My kingdom for an edit button. PCE runs lower than CPI.
“…all of which gave companies enormous pricing power, and they used it.”
This is a reminder that the Invisible Hand of the Market only works when the incentives are aligned properly, and competition exists. When a force is introduced that distorts the capitalistic landscape, it can shortcircuit the good that business does. The ancient ethical concept of a “just profit” has been carried over into modern antitrust activities. This legislative assertiveness, on behalf of the consumer, acts to curb companies’ “enormous pricing power.”
On the Federal Reserve’s official website it says the yardstick is headline PCE not core PCE.
And since August 2020 the FOMC officially announced that they are targeting average of 2% over the long term so periods of undershooting would be followed by tolerating overshooting and vice versa. The FOMC has so far not rescinded this objective.
Since that announcement headline PCE has overshot significantly by more than double i.e. over 4% instead of 2%. So according to the Fed’s own official policy framework they should now be tolerating a few years of significantly below 2% for headline PCE.
Depends on when you start your targeting. The average headline PCE for the last 30 years is now 2.0%.
The Fed’s target is 2% overall inflation on average over time. The yardstick to measure how close it is to the target is core PCE because energy screws up the headline figure, up and down, and the Fed is not going to react to energy prices spiking or plunging.
It its official communications — FOMC meeting SEP, minutes, etc. — it always lists both.
It’s Nov 1st. Inventories of 2024 car models are high. Prices are abnormally high. Incentives are too low. Very few people visit their parking lots. The legacy mfg cut production bc the dealers are saturated with old models (2024).
I would say this is manufacturer and model specific. Stellantis products? Absolutely the case and maybe most of the domestic mfg are experiencing the same thing. Even C8 C06 can be have for $10K under MSRP, although much like the housing market SoCal dealers still have their head up their A$$ with pricing either because they can get away with it or they are too stubborn to budge.
On the other hand, this inventory and pricing problem doesn’t seem to be the case for Porsche unfortunately…maybe for the Taycan and lower end Macan otherwise people still gobbling them up at high price it seems like
Many here are betting for higher inflation forward. So, stay out of bonds?
‘But energy prices plunged’
A huge factor, maybe THE factor, ex of course the Fed.
Just checked the chart and on June 10, 2022, oil was 117 a barrel.
We are getting a real easy break here. It may not last.
– If one Wolf Richter wants to argue that the FED is going to raise /should raise rates then he is mistaken. Mr. Market is still convinced that the next move will be a rate cut of 25 or 50 basispoints. In spite of rising inflation.
– And the yield curve has also gone from “Inverted” to “Steepening”.
“If one Wolf Richter wants to argue that the FED is going to raise /should raise rates then he is mistaken.”
I have no intention of arguing that.
I’m convinced the Fed will not raise its rates this year. I’m 100% convinced. Not going to happen. The Fed made that clear, all you have to do is listen to them.
I’m pretty sure the Fed will cut at least by 25 basis points this year, maybe more.
– I assume that the FED will come up with some idiotic logic to justify to cut / not raise rates.
Wolf,
These are great charts. A picture is worth a thousand words.