Month: September 2024

August PCE Inflation

Posted on by peter.c.rupert

by paul gomme and peter rupert

The Bureau of Economic Analysis announced that the price index for personal consumption expenditures (PCE) increased 1.09%, on an annualized basis, in August following a 1.85% increase in July. The year over year reading came in at 2.2% following 2.7% in July. Our preferred measure of “trend” inflation continues to fall and came in at 1.65% after a 1.92% in July.

The Fed tends to put more weight on the core PCE, the PCE excluding food and energy (PCEX). Over the month the BEA shows an annualized 1.58% increase. The year over year reading came in at 2.68%, slightly higher than the 2.65% reading in July. Our trend measure for August is 2.12% following a 2.39% reading for July.

The two main components of the PCE price index, goods and services, show much different behavior. The annualized goods component for August was -1.82% and the services component was 2.46%. This has been roughly the pattern for all the year over year and trend measures over the past few months.

Fed Governor Christopher Waller was recently interviewed on CNBC, and was quoted as saying that PCE price inflation for August would be “very low” and that “inflation is softening much faster than I thought”. Our measure of trend core PCE inflation is still above the FOMC’s 2% target. Granted, monetary policy is said to operate with long and variable lags. Still, for the purposes of Fed credibility and keeping inflation expectations in check, it might have been a good idea to have waited until inflation was well and truly contained. Indeed, the FOMC commented in the July 31 statement:

The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

Looking at the PCEX graph above all of the measures were moving sustainably to the 2% target starting in 2023, however, there was a bounce in those measures in late 2023 and early 2024. Moreover, the real side of the economy is strong. While concern has been expressed regarding the unemployment rate, by historic standards it’s still rather low. It strikes us as premature to declare “mission accomplished.”

August Inflation

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The Bureau of Labor Statistics announced that the consumer price index (CPI) increased 0.2% over the month on a seasonally adjusted basis. On an annualized basis, the CPI increased 2.27%, up 0.41 percentage points from July’s 1.88%. The year over year reading was 2.59% which is down 0.33 points from the 2.92% recorded in July. One way to think about the fall in the year-over-year inflation rate is that it’s the average of the current and past 11 months’ monthly inflation rates. Consequently, the decline in the year-over-year inflation rate can be attributed to dropping the 6.32% monthly inflation rate from August 2023 while adding the lower 2.27% for August 2024. Our preferred trend measure came in at 1.87%. While the trend number looks pretty good on the surface at 1.87% it has been creeping up over the last few months: 1.58% in June, 1.68% in July and now 1.87% in August.

The core (ex food and energy, CPIX) measures tell a slightly worse story, with the annualized number hitting 3.42%, the year over year up 3.26% and our trend measure up 2.68%. There were very large declines in the monthly numbers for energy products: gasoline down 0.6%, fuel oil down 1.9% and energy services down 0.9%. Used cars and trucks also saw a large decline of 1.0%.

Chairman Powell has all but promised “Christmas in September” in the form of a cut in the Fed funds rate. Moreover, given the relationship between the CPI measures and the Fed’s preferred Personal Consumption Expenditure core measure means that this measure of inflation will likely show an increase when it’s released in a couple of weeks. While the unemployment rate has been creeping up, real output growth has been robust. (If the US is deemed in some dire situation with a 4.2% unemployment rate, pity Canadians with their 6.6% rate) In our humble opinions, the current inflation data do not warrant such a cut, much less the 50 basis point cut hoped for by some commentators.

August Employment Report

Posted on by Paul Gomme

On September 6, the Bureau of Labor Statistics released its employment report for August. According to the Establishment Survey, the US economy added 142 thousand jobs in August. In addition, the previous two months were revised down, -61 in June and -25 in July. The Household Survey put the gain at 168 thousand jobs.

From the Establishment Survey, the leisure and hospitality sector added 46 thousand jobs; construction 34 thousand jobs; and health care 30 thousand jobs. Sectors losing jobs were led by manufacturing (24 thousand) and retail trade (11 thousand).

Average weekly hours rose from 34.2 to 34.3 so that total hours of work increased by 4.7%. Average hourly earnings increased 0.4%, from $35.07 to $35.21.

The unemployment rate, derived from the Household Survey, fell marginally, from 4.25% to 4.22%. (The headline numbers are touting a decline from 4.3% to 4.2%.) However, a broader measure of the unemployment rate which includes marginally attached individuals rose between July and August, from 7.8% to 7.9%.

Policy Implications

Is strength or weakness in the eye of the beholder? Or rather, in the data of the beholder?

Given the signaling from members of the FOMC, it’s pretty clear that the committee will lower the Federal funds rate at its next meeting later in September. Speculation is growing that the committee may deliver a 50 basis point reduction rather that `just’ a 25 point reduction. The case for a more aggressive loosening of monetary policy lies on the real side of the economy. Where does this weak real side show up? Maybe in the employment numbers reported above. Yet, the same report shows a slight decline in the unemployment rate and a 48 thousand decline in the number unemployed. The labor force increased by 120 thousand. As mentioned above, wage growth was fairly strong and total hours increased substantially. Second quarter real GDP growth was revised up from 2.8% to 3.0%. Considering that US population growth is running around 0.5% per year, real per capita output growth for the second quarter is around 2.5% which is well above its long run average. Meanwhile, while PCE inflation has fallen, it is still a bit above the FOMC’s 2% target.