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PCE Price Index: Core Measure Falls Further Below Fed Target

  • Written by Syndicated Publisher No Comments Comments
    December 10, 2013

    The October Personal Income and Outlays report for October was published last week by the Bureau of Economic Analysis.

    The latest Headline PCE price index year-over-year (YoY) rate of 0.74% is a decline from last month’s adjusted 0.95% (previously 0.92%). The Core PCE index of 1.11% is fractionally lower than last month’s adjusted 1.22% (previously 1.19%).

    As I pointed out last month, the general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has consistently moved in the wrong direction since early 2012 and, after flatling since May, it has now slipped lower.

    The adjacent thumbnail gives us a close-up of the trend in Core PCE since January 2012. The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I’ve also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed’s preferred indicator for gauging inflation. I’ve highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed’s target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

     

     

    I’ve calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.

    For a long-term perspective, here are the same two metrics spanning five decades.

     


    Note: I use the data from Table 9 in the full release and tables available here.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.

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