By Paul Gomme and Peter Rupert
The BEA, back up and running, announced that PCE inflation was 3.27% (on an annualized basis) in September, up from 3.14% in August. The year over year number also increased, from 2.74% in August to 2.79% in September. Our preferred trend measure also moved up, from 2.70% in August to 2.89% in September.
Excluding food and energy, PCEX, actually fell slightly, from 2.68% to 2.40%. The year over year number also fell, from 2.90% to 2.83%. Our calculated trend measure fell from 2.82% to 2.68%.
A Longer Perspective
Recall that in the pandemic period, the Fed fucked up badly on the inflation front. PCE/PCEX inflation started falling starting in mid-2022. Breaking the PCE price index into its components, goods and services, our chart shows that the bulk of the progress on the PCE/PCEX inflation front came from its goods component which declined rapidly in late 2022, and has exhibited deflation (negative inflation) for some time (so much for the Keynesian adage that prices are downward sticky). In contrast, PCE services inflation was slow to come down and has run persistently above the Fed’s 2% target for PCEX inflation.
This breakdown between goods and services has gained traction among those trying to parse out, in real time, the effects of the Trump tariffs on prices and inflation. The idea is that the effects of these tariffs will be seen first in goods prices. Through 2025, our charts show a gradual rise in PCE goods inflation; the large increase in the monthly goods inflation rate in September has pushed our measure of trend above the Fed’s 2% target. This behavior of PCE goods inflation is consistent with the tariffs story. That PCE/PCEX inflation has been flat (or mildly rising) in 2025 is now due to the moderating effect of somewhat lower PCE services inflation (albeit, still above the magic 2% target).
Once again the Fed is in a bit of a sticky position. Inflation is not moving in the right direction. The real side of the economy is chugging right along, see this bullish report from the Financial Times. The calls for another rate cut at the meeting next week, in our view, are premature.
