Elizabeth Renter’s Post

We just had deflation (not inflation, not disinflation, but actual deflation) in November! According to the PCE index, Headline PCE was down 0.1% in November. If we remove food and energy prices from that, Core PCE rose 0.1% in November (3.2% YoY). According to the Fed Rate Monitor tool, the markets think there's only a 10% chance that the Fed Funds rate remains this high by March. Put another way, the markets think there's a 90% chance that the Fed will cut at least once within the next 3 months! As I already mentioned in a previous post (https://lnkd.in/gazGa5C8), not only is inflation falling quickly, but the inflation reading that we're getting is still artificially inflated due to the way the number is calculated. With that in mind, and the fact that we actually got deflation in November, I'm actually starting to think that rate cuts are coming sooner than I previously thought. Not only will the housing portion of inflation continue to decline, but I think the base effect is working in our favor as well. The January 2023 monthly PCE increase was 0.6%! Once we get to February 2024, that massive 0.6% number will roll off and ideally get replaced with an inflation figure closer to 0%, which will tank the year over year PCE reading. I think 2024 is going to be a good year for the Fed.

5 Things to Know - Thing 1) The PCE is as Expected: DKI Takeaway: It’s 11am on Friday as I write this, and I’ve already read multiple articles about how the “lower” PCE means the Fed should lower interest rates in June. The PCE was up by 0.1% and the Core PCE was down by 0.1%; both within a reasonable margin of error. The 0.3% monthly increase annualizes to 3.7%. It’s possible that another few months of CPI and PCE data could influence the Fed to lower rates at the June meeting. However, this same PCE report is being cited by the hawks (people who prefer higher interest rates) as proof they’re right while doves (who favor lower rates) claim it validates their beliefs. Current Fed Chairman, Jerome Powell, offered public comments that will be interpreted by both sides as favorable to their preferred path. My view is we’re seeing sticky inflation, and the Fed should be very careful about lowering interest rates too early. That’s the mistake made by former Fed Chairman, Arthur Burns in the 1970s.

This feels like October all over again… - Higher for longer - Inflation is reaccelerating - The next move is a hike, not a cut Last year, everyone was quick to point out the long lag for inflation, and yet here we are responding as if the sky is falling. More than 25% of CPI is from Owner’s Equivalent Rent, the survey where they ask homeowner’s how much they would rent their house out for. And that was before the BLS increased the weighting to this odd question. Today’s rate movements are overdone and the market should be waiting for Core PCE before throwing in the towel on cuts. The Fed will still cut this year because the current braking action got us from 9.1% to today’s levels. We don’t need the same amount of braking action for the last mile because that will likely break the economy.

5 Things to Know - Thing 1) The PCE is as Expected: DKI Takeaway: It’s 11am on Friday as I write this, and I’ve already read multiple articles about how the “lower” PCE means the Fed should lower interest rates in June. The PCE was up by 0.1% and the Core PCE was down by 0.1%; both within a reasonable margin of error. The 0.3% monthly increase annualizes to 3.7%. It’s possible that another few months of CPI and PCE data could influence the Fed to lower rates at the June meeting. However, this same PCE report is being cited by the hawks (people who prefer higher interest rates) as proof they’re right while doves (who favor lower rates) claim it validates their beliefs. Current Fed Chairman, Jerome Powell, offered public comments that will be interpreted by both sides as favorable to their preferred path. My view is we’re seeing sticky inflation, and the Fed should be very careful about lowering interest rates too early. That’s the mistake made by former Fed Chairman, Arthur Burns in the 1970s.

Do you know why the Fed prefers PCE index versus CPI index? Do you know why I put Alan Greenspan's pic on this article? I knew that the Fed liked to target inflation excluding food and energy. And I knew that PCE can be reviewed excluding food & energy. But I didn't really know the reason why the Fed preferred PCE. Now I can share it with you, dear reader. I just read a fascinating little article this morning on my WSJ app that explains the not-so-subtle difference between CPI and PCE, and explains why the Fed prefers PCE. So here goes. The CPI (Consumer Price Index) is a survey-based index prepared by the Labor Department. So in other words, they ask people to tell them how much they are paying for stuff. Hmmm. Ok. Sounds kinda like that most un-scientific rating system called Nielsen ratings. They call people on the phone and ask them what they watched on TV last week, basically. Surveys might have worked in the '70s when there was no hard data available. But now, everything is tracked, everything is digital. Get some data, write some SAS code, use a pivot table. Come on people! Everything is tracked. The PCE (Personal Consumption Expenditures) Index is a data-based index calculated by the Commerce Department. It looks at real live data on all these different spending categories and compares prices to prior periods. Sounds like a way better approach to me. Alan Greenspan agreed - 24 years ago - when he was the Chairman of the Fed. He said the following in a Congressional testimony in February 2000: “Why we should look at data based on a distorted sample when we have a universe whose data are more accurate is beyond me.” In addition, when the Fed officially adopted its 2% inflation target, back in 2012, it was for PCE inflation. Not CPI. So I guess that means when you see a report about CPI being so great, you nod your head... take it with a grain of salt... and then you wait for the PCE index to be reported. That's the one that really counts in terms of Fed policy. By the way, Core PCE was reported at 2.8% this week. Still above the 2% target, but that 2-handle means we are circling the rim. Food (and energy) for thought... #fedpolicy #interestrates #riskmanagement

The core personal consumption expenditures (PCE) price index, the Fed's preferred inflation measure, confirmed stalled progress toward the 2% target in the first quarter, aligning with previous CPI data. Core PCE rose 0.3% from the prior month and 2.8% from a year ago, similar to February's levels but lower than core CPI due to differing housing weight. Despite elevated inflation, the Fed is expected to maintain its patient stance on rate cuts given economic resilience. We anticipate inflation to moderate in the coming months, possibly prompting Fed rate reductions later this year. While recent inflation trends may raise concerns, a slowdown in rents and wage growth could shift the narrative, with further inflation progress expected over time. #EconomicUpdate

The PCE, (Personal Consumption Expenditures) is the Fed's favorite inflation measure. The reading came in higher, but lower than estimates for the month to month measure. Year over year, we are about the same. The Fed will start reducing rates when inflation comes down, and/or unemployment goes up. Don't expect any changes in Fed policy based on this report.

Inflation continues to cool. The Fed’s preferred inflation measure increased 3% in October, down from 3.4% in September and getting closer to the central bank’s much-ballyhooed target of 2%. A drop in gas prices—down 4.9% from the previous month—was a major factor. Increases in core prices, which strip out food and energy costs, also slowed last month. In the last six months, core inflation has grown at a 2.5% annual rate—down significantly from 5.1% last year. The news means the Fed will likely keep interest rates unchanged at its final 2023 meeting on Dec. 12 and 13. https://lnkd.in/eZkadtjJ #financialnews #financeandeconomy #economicnews #economicrecovery #inflation #inflationreduction

The latest reading of the Fed's preferred inflation gauge showed inflation eased in May as prices increased at their slowest pace since March 2021. The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 0.1 % in May from the prior month, in line with Wall Street's expectations and slower than the 0.3% increase seen in April. Core PCE was up 2.6% over the prior year in May, in line with estimates. May's reading marked the slowest annual gain in more than three years. Read more: https://lnkd.in/gC5pEpm9

As widely expected, the Federal Reserve left the overnight fed funds interest rates unchanged in the range of 5.25% to 5.50%. The sticky inflation which the Fed is finding so irksome, is showing up in a variety of reports: - Personal consumption expenditures (PCE) price index rose 0.4% month-over-month in March as expected, but it was still the fourth month moving the wrong way. - The Fed's favorite gauge of inflation is the core PCE price index, which strips out volatile food and energy prices. That measure rose 0.3% month-over-month in March as expected. In terms of the actual dollar amount spent, consumers kept rolling along in March, with real personal consumption expenditures (PCE) posting a 0.5% month-over-month increase in spending, bringing the year-over-year rate to 3.1%, the second highest in two years, and well above 2.4%, the average of the 20 years before Covid. Read more about consumption and inflation in my latest North Report: https://ow.ly/V75p50RARjF