What just happened?
The August US personal consumption expenditure price index (PCE), or PCEPI as it is referred to by the US Federal Reserve (Fed), recorded on September 27 on an annualized basis was 2.2% y/y, the lowest print of a key inflation indicator since March 2021. This is an vital step toward the Fed being able to declare “victory” over inflation as price indexes continue to decline toward the U.S. central bank’s overall target of 2% annual PCE inflation.
Despite the pink print in August’s headline PCEPI inflation, several headwinds to achieving the Fed’s policy goals remain. Core PCEPI, a measure of PCE inflation that excludes food and energy prices that are subject to seasonality and volatility, rose to 2.7% y/y in August, indicating that underlying price pressures remain.
Why does PCE inflation matter?
PCEPI is a key indicator in the Fed’s broad range of metrics. The Fed generally favors the PCEPI over the widely followed Consumer Price Index (CPI) because the basket of goods and services used to track the PCEPI is adjusted more regularly to include out-of-pocket spending by both urban and rural communities. CPI inflation rates only take into account consumer spending in urban regions, and the CPI is updated twice a year, as opposed to the quarterly rebalancing of the PCEPI. For this reason, the Fed is paying more attention to changes in PCEPIs when setting targets and debating policy changes.
What will happen next?
As PCEPI data continues to move closer to the Fed’s price targets (albeit in a tentative manner), the Fed and global markets will head toward the next round of key U.S. labor and employment data. The Fed will also look for signs of confirmation in other inflation indicators, such as monthly CPI data, to confirm that inflation will continue to move in its preferred direction.
Economic indicator
Personal consumption expenditure – price index (y/y)
Personal Consumption Expenditures (PCE) data, published monthly by the U.S. Bureau of Economic Analysis, measure changes in the prices of goods and services purchased by consumers in the United States (US). The y/y reading compares prices in the reference month with the previous year. Price changes may cause consumers to switch from purchasing one good to another, and the PCE deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
