Bottom line: core PCE (Personal Consumption Expenditure) inflation is down. The monthly annualized inflation rate fell from 1.8% in October to 0.7% in November; the year-over-year rate fell from 3.4% to 3.2%; and our preferred three month annualized rate fell from 2.3% to 2.2%. Ignoring the very noisy monthly rate, these declines are in keeping with our “prediction” of small changes in core PCE inflation based on the earlier CPI (Consumer Price Index) report for November.
Looking at overall PCE price inflation, the three month annualized rate plunged from 3.1% in October to 1.4% in November; the year-over-year rate fall was more modest, from 2.9% to 2.6%. These declines are in line with those of the earlier CPI report.
Given the continued decline in almost all measures of inflation it seems that the Fed will be looking closely at the “real” side of the economy. In fact, the recent revision of GDP by the BEA showed that the third (and final) estimate came in at 4.9%, down from 5.2% in the second estimate. According to the BEA the downward revision primarily reflected a decline in consumer spending, from 3.6% to 3.1%.
In its most recent announcement, the Fed noted,
Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
The latest revision to the third quarter tells us that the third quarter wasn’t quite as strong as previously reported. The Fed puts a lot of resources into nowcasting the US economy, so FOMC’s statement about slowing growth in the fourth quarter is probably a good read on the economy. The downward revision in the third quarter suggests that the fourth quarter may be even weaker than the Fed thought. With core PCE inflation edging closer to the Fed’s 2% target, and a weaker real side to the US economy, further hikes in the Fed funds rate seem unlikely.
