According to recent BEA release, inflation as measured by the PCE (personal consumption expenditure) price index rose in August. On a month-over-month basis, this measure of inflation shot up from 0.61% in July to 3.79% in August. There was a more modest increase, from 3.36% to 3.42%, on a year-over-year basis. Our measure of trend rose from 3.36% to 3.42%.
As our readers well know, the Fed places more emphasis on core PCE inflation — that is, after removing the food and energy components. By this measure, monthly inflation rose from 1.52% to 3.01% (annualized) while the annual rate was almost unchanged, increasing from 2.98% to 3.01%. Our measure of trend bumped up from 2.46% to 2.64%.
Chairman Warsh has commented previously about inflation measures and some have suggested using a “trim” rather than a “core” measure. The PCE trimmed mean came in at 1.92% on an annualized monthly basis and 2.19% year over year. We will see what measure the Fed will start to rely on….
These inflation numbers put the Fed in a bind. 3% is well above the committee’s stated target of 2%. To be sure, the trimmed mean PCE inflation rate is near the Fed’s target — but there’s always a danger that the Fed will be seen as shopping for some measure of inflation that meets its target. While the FOMC raised the Fed funds rate by 0.25 percentage points at its last meeting in mid-September, it’s not clear that this increase is sufficient to bring inflation down to target in a timely fashion.
