Surprising August Inflation Slowdown Sparks Interest

The preferred inflation indicator of the Federal Reserve, the personal consumption expenditures (PCE) price index minus food and energy, showed a smaller than expected rise in August according to CNBC.

The index increased by 0.1%, below the 0.2% forecast by the Dow Jones consensus of economists. Over a 12-month period, the core PCE experienced a 3.9% growth, meeting expectations, and showing the lowest monthly increase since November 2020.

This moderate increase in the PCE price index suggests that inflation may be experiencing a temporary slowdown, easing concerns about prolonged surges in consumer prices.

However, economists continue to closely monitor the situation, as supply chain disruptions and labor shortages remain significant factors that could fuel future inflationary pressures.

Consumer Spending Grows at Slower Pace

Although consumer spending grew, the pace was slower compared to July, with the current-dollar basis witnessing a 0.4% rise. In actual terms, the spending increased by only 0.1%, following a 0.6% growth in July. This slowdown in spending can be attributed to various factors, including concerns over the Delta variant and supply chain disruptions.

However, it is important to note that the overall trend in consumer spending remains positive, indicating a steady recovery in the economy.

Inclusion of Food and Energy in PCE Index

When including food and energy, the PCE index saw a 0.4% rise for the month and a 3.5% growth compared to the previous year. In recent months, headline inflation has been steadily increasing, reaching 3.2% in June.

This upward trend in inflation can be attributed to factors such as supply chain disruptions and increased demand as economies reopen following pandemic lockdowns.

The ongoing rise in key inflation indicators has raised concerns among economists and policymakers about the potential impacts on economic growth and consumer spending.

Benefits of Using the PCE Index for Assessing Inflation

The PCE index, which takes into account shifts in consumer behavior, such as opting for cheaper goods over pricier alternatives, provides a more precise cost-of-living picture compared to the consumer price index. Additionally, the PCE index tracks a more comprehensive and diverse set of goods and services, making it a preferred data set for many economists when assessing inflation trends.

It serves as a valuable tool for both consumers and policymakers, as it helps to better understand the ever-changing dynamics of personal consumption and expenditure in an economy.

Implications of the Core PCE’s Sub-4% Year-over-Year Reading

The core PCE’s initial sub-4% year-over-year reading in almost two years, a drop from 4.3% in July, indicates the Federal Reserve’s progress in addressing inflation.

This downward trend in inflation rates demonstrates the impact of the central bank’s monetary policy measures, such as adjusting interest rates and controlling the money supply. However, experts warn that persistent external factors, such as supply chain disruptions and labor shortages, may still pose challenges in achieving long-term price stability.

Importance of Continued Monitoring of Economic Indicators

Despite the recent PCE report being a positive for the Fed, Quincy Krosby, chief global strategist at LPL Financial, cautioned that “declaring success in controlling inflation would be premature.”

Krosby emphasized the importance of sustained monitoring of economic indicators, particularly as markets continue to navigate the uncertainties brought about by the ongoing pandemic. He also highlighted that while short-term progress has been made, understanding the long-term effects of monetary policy decisions on inflation is crucial to maintaining stable economic conditions.

Monthly Inflation Driven by Increasing Prices for Goods and Services

Monthly inflation was predominantly driven by increasing prices for goods and services. This upward trend can largely be attributed to supply chain disruptions and rising demand as the global economy recovers from the pandemic.

In addition, higher energy and transportation costs have also contributed significantly to this surge in inflation rates.

FAQs

What is the preferred inflation indicator of the Federal Reserve?

The preferred inflation indicator of the Federal Reserve is the personal consumption expenditures (PCE) price index minus food and energy.

What was the core PCE growth rate for August?

The core PCE experienced a 3.9% growth over a 12-month period in August, meeting expectations and showing the lowest monthly increase since November 2020.

How did consumer spending grow in August compared to July?

Consumer spending grew at a slower pace in August compared to July, with a 0.4% rise in current-dollar basis and a 0.1% increase in actual terms.

Why is the PCE index considered a more accurate measure of inflation than the consumer price index?

The PCE index is considered more accurate because it takes into…