The Fed’s preferred inflation gauge, the Core PCE Price Index, came in at 4.9 percent on a year-over-year basis and 0.6 percent on a month-over month basis in August, higher than market expectations of 4.7 percent and 0.5 percent respectively. The general PCE Price Index which includes food and energy came in at 6.2 percent y/y and 0.3 percent m/m. Consistent with the Consumer and Producer Price Indices released earlier this month, today’s report reaffirms that the bulk of the inflationary pressure is currently coming from services. Goods ex-energy are still rising albeit at a slower pace than services while overall, commodities are declining.
Services rose 0.6 percent from the July level with transportation services, housing and utilities, and financial services and insurance leading the pack with increases of 1.9, 0.8 and 0.8 percent. Food services and accommodations, other services and health care also contributed to gains but at a more modest level. The only segment of services that notched a decline was recreation services which came in at -0.2 percent. Consumers may be cutting back on fun due to a slowing economy and rising uncertainty.
Goods fell 0.3 percent from the July level entirely due to gasoline and other energy goods which fell 10.0 percent during the period. Almost every other segment in the goods category notched an increase during the period. In the non-durable goods sub-category, the increases were led by 0.8 percent rises in food and beverages away from home and in other non-durable goods. Clothing and footwear also contributed to gains albeit more modestly. In the durable goods sub-category, furnishings and durable household equipment notched a gain of 0.6 percent while motor vehicles and parts and recreational goods and vehicles also contributed to gains. Other durable goods came in unchanged. While many expected supply chain improvements and the pandemic demand shift from goods to services to dampen price pressures for goods, that hasn’t materialized. Supply chains and labor shortages remain worse than pre-pandemic levels and the partial shift from globalization to regionalization is reversing efficiency gains. These developments are keeping goods prices higher than the Fed would like.
Personal spending came in above expectations at a 0.4 percent gain versus the 0.2 percent consensus forecast while personal income was in-line at a 0.3 percent gain. Spending is outpacing income, and the personal savings rate remains severely depressed at 3.5 percent, levels lastly seen during the great financial crisis of 2008. I continue to suspect that consumers are relying on their credit cards to maintain spending levels. High credit card debt is great for GDP because it boosts consumption, but not great for household balance sheets during a time of rising interest rates.
The Fed’s inflation target on the Core PCE Price Index is 2 percent, which means that today’s report is almost 2 and a half times above target. Short term bond yields are up modestly on the report while the S&P 500 is looking to make new lows while I’m writing this piece. This report is not good for the Fed’s goals of slower inflation and keeps the pressure on them to continue hiking. Inflation is proving stickier and more resilient than investors would like.
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