By Paul Gomme and Peter Rupert
The BEA announced that inflation as measured by the Personal Consumption Expenditures was -1.30% (the price index actually fell) in June following a 5.67% rate in May. The monthly volatility is well-known and so our preferred trend measure smooths out these fluctuatons; this measure of trend inflation fell from 5.40% to 3.17%. On a year-over-year basis, inflation fell more modestly, from 4.08% to 3.67%.
Core PCE inflation (removing food and energy) fell from 4.06% to 1.60% on a month-over month basis, and from 3.42% to 3.29% measured on a year-over-year basis. Our trend measure fell from 3.79% to 3.06%.
It’s no longer clear which measure of inflation the FOMC pays attention to. For quite some time, the committee focused on core PCE inflation (although no idea if they ever specified monthly or annual rates, or something else). Chairman Warsh favors a so-called “trimmed mean” PCE measure. The Federal Reserve Bank of Dallas produces two such measures. Basically, a trimmed mean inflation measure computes inflation rates for each of the components of the PCE, then drops out a certain fraction of the components based on whether they are exceptionally high or low. Finally, the trimmed mean inflation rate is computed as a weighted average of the remaining components. Pretty straightforward, right 😉 The trimmed mean based on month-over-month inflation fell from 2.66% to 1.44%. In other words, by this measure, inflation has fallen below the Fed’s stated 2% target — at least for one month. It’s not clear that other members of the FOMC are convinced; three members dissented at the July’s FOMC meeting, preferring raising rates (tightening monetary policy).
The BEA also announced the advance estimate for Q2 GDP was 1.5%, not a particularly strong or weak number…one that will not change anyone’s mind about where the economy may be headed. The largest contributor to the growth was consumption
While the PCE price index is the so-called Fed’s preferred measure, tracking purchases by domestic consumers, the Q2 GDP report provides a broader statistic than the PCE, it is the price index for domestic purchases that adds to the PCE private investment and government spending and that popped to 5.7%
