What is PCE inflation and why does it matter?

Vaseline4 weeks ago

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What just happened?

The August US personal consumption expenditure (PCE) price index, or PCEPI as the US Federal Reserve (Fed) refers to it, posted an annualized 2.2% on September 27, the lowest print of key inflation reading from March 2021. This is an important step for the Fed to claim “victory” on inflation as price indices continue to ease towards the US central bank’s broad target of 2% annual PCE inflation.

Despite August’s rosy PCEPI inflation print, several obstacles remain to the Fed’s policy goals. Core PCEPI, a measure of PCE inflation that excludes food and energy prices that are subject to seasonality and volatility, rose to 2.7% YoY in August, meaning underlying price pressures remain.

Why does PCE inflation matter?

The PCEPI is a key measure in the Fed’s stable broad range of values. The Fed generally favors the PCEPI over the widely tracked consumer price index (CPI) because the basket of goods and services used to track the PCEPI is adjusted more regularly and includes out-of-pocket spending for both urban and rural communities . . CPI inflation measures only look at consumer spending in urban areas, and the CPI index is updated semi-annually, unlike the quarterly rebalancing of the PCEPI. For this reason, the Fed gives more weight to changes in the PCEPI numbers when setting targets and debating policy changes.

What happens next?

With the PCEPI numbers continuing to move closer to the Fed’s price targets (albeit in a shaky way), the Fed and global markets will turn to the next round of key US labor and employment numbers. The Fed will also look for signs of confirmation in other inflation metrics, such as the monthly CPI figure, to confirm that inflation will continue to move in its preferred direction.

Economic indicator

Personal consumption expenditure – Price index (annual)

Personal consumption expenditures (PCE), published monthly by the US Bureau of Economic Analysis, measures changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices from the reference month to one year earlier. Price changes may cause consumers to switch from one good to another, and the PCE Deflator may take such substitutions into account. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US dollar (USD), while a low reading is bearish.

Frequently asked questions about inflation

Inflation measures the increase in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month (month-on-month) and year-on-year (YoY). Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The consumer price index (CPI) measures the change in the prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change from month to month (month-to-month) and year-to-year (year-to-year). Core CPI is the figure targeted by central banks because it excludes volatile food and fuel inputs. When core CPI rises above 2%, higher interest rates usually result, and vice versa when it falls below 2%. Because higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country increases the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a profitable place to park their money.

Previously, gold was the asset investors turned to during periods of high inflation because it held its value, and while investors will often buy gold for its safe haven properties during periods of extreme market turbulence, this is not the case with most of the time. . This is because when inflation is high, central banks will raise interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold versus an interest-bearing asset or putting money in a cash deposit account. On the other hand, lower inflation tends to be positive for gold as it lowers interest rates, making the shiny metal a more viable investment alternative.

Vaseline4 weeks ago

0 3 minutes read