US PCE inflation for August 2023 bounces to 3.5%, on energy prices

2 Oct 2023 , 08:54 AM

For the month of August 2023, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation at 3.5%. It may be recollected that the July inflation, which had been originally announced at 3.3%, had been revised up to 3.4% with more data points coming in. This has been the case across the board for previous months, so it is very likely that even the August inflation could spike higher from 3.5%. However, the spike in PCE inflation in the last 2 months shows that the PCE inflation has approximately followed the same trend as the consumer inflation. Every month, the US announces two different types of retail inflation. 

The first type of consumer inflation is the CPI inflation, which is announced by the US Bureau of Labour Statistics (BLS) around the middle of each month for the previous month. The second type of retail inflation is based on personal consumption expenditures (PCE) and is also referred to as PCE inflation. This measure looks at inflation from a consumer spending perspective rather than from a price basket perspective. The PCE inflation is announced towards the end of the month for the previous month. The US BEA has just announced the PCE inflation for August 2023 at 3.5%. Let us quickly look at the time series trend of PCE inflation and core PCE inflation (excluding food and energy).

PCE inflation for August 2023 inches up to 3.5%

In fact, June 2023 was the month when the PCE inflation downtrend ended at 3% (later revised to 3.2%). Since then, the inflation in July spiked to 3.3% (later revised to 3.4%) and to 3.5% in August 2023. Like the CPI inflation in the US, even the PCE inflation has shown a rising trend since June 2023. The table captures PCE inflation (yoy) over last 6 months.

Month	Headline PCE Inflation	Core PCE Inflation
February 2023	5.0%	4.7%
March 2023	4.2%	4.6%
April 2023	4.4%	4.8%
May 2023	4.0%	4.7%
June 2023	3.2%	4.3%
July 2023	3.4%	4.3%
August 2023	3.5%	3.9%

Data Source: Bureau of Economic Analysis (US)

The above table shows the two readings of PCE inflation that the Fed and other policymakers look at closely. The headline PCE inflation is the overall price hike across all the three categories. The last column of core PCE inflation captures the inflation excluding food and energy. Why is core PCE inflation so important. While the food inflation and energy inflation tend to be cyclical, the core inflation tends to be more structural in nature. The difference is subtle but important form a policy perspective. Most central banks worry more about the core inflation as it is less amenable to policy based adjustments. On the other hand, the food and energy inflation are based on demand and supply factors and there are policy measures that the government can use to address them.

Core inflation was something seen in abundance in the post COVID period. Supply struggled to keep pace with demand due to supply chain disruptions and the delayed policy response in China. This led to an all-round spike in inflation, especially core inflation. However, there is good news on the core inflation front for the US economy. For example, while the headline inflation has bounced back in the last two months, the core PCE inflation has continued its downtrend since April 2023. During this period, the core PCE inflation has tapered from 4.8% to 3.9%. OF course, for the Fed, the target is 2% headline PCE inflation and 2% core PCE inflation with a first target of 3% for core PCE inflation. But, we will come back to this point later.

Break-up of US PCE Inflation for August 2023 (YOY)

The US Bureau of Economic Analysis (BEA) publishes the PCE inflation on a yoy basis and on a high frequency MOM basis. Let us first look at PCE inflation on a yoy basis for the last 8 months to get a trend. We also look at the components of this yoy inflation change.

Break-up of PCE Inflation (YOY)	Jan-23	Feb-23	Mar-23	Apr-23	May-23	Jun-23	Jul-23	Aug-23
Headline PCE Inflation (Year on Year)	5.5	5.2	4.4	4.4	4.0	3.2	3.4	3.5
Goods	4.4	3.6	2.0	2.2	1.2	-0.4	-0.2	0.7
Durable goods	0.6	0.3	0.4	0.5	0.4	-0.5	-1.0	-1.9
Nondurable goods	6.7	5.5	2.8	3.1	1.6	-0.3	0.2	2.1
Services	6.0	6.0	5.7	5.6	5.4	5.1	5.3	4.9
Addenda:
Core PCE excluding food and energy	4.9	4.8	4.8	4.8	4.7	4.3	4.3	3.9
Food	10.6	9.5	7.9	6.9	5.9	4.7	3.7	3.1
Energy goods and services	7.8	4.3	-7.6	-5.7	-12.3	-17.5	-13.0	-3.6

Data Source: US Bureau of Economic Analysis (BEA)

The above table givers a break up of the latest PCE inflation and the inflation reading for the last 8 months on two classifications. Firstly, it classifies the inflation into goods and services inflation. Secondly, it classifies PCE inflation into the 3 core headers of food inflation, energy inflation and core inflation. Here are some of the takeaways.

• The headline PCE inflation showed a falling trend from January to June 2023, but has bounced since then. Recent revisions indicate that fresh data is only hinting at more inflation in the coming months.

   

• PCE inflation for goods has been positive at 0.7% in the month of August 2023. It has shown a bounce from negative goods PCE inflation in the last 2 months. However, a more interesting trend emerges when the goods inflation of 0.7% is broken up.

   

• The goods inflation components actually show a contrasting trend. For example, inflation in durable goods is -1.9%, the lowest in the last 8 months. However, the inflation in non-durable goods stands at 2.1%, which is the best in the last 5 months. Hence the overall goods inflation of 0.7% may be misleading as the trend in durable and non-durable goods inflation is an absolutely dichotomy.

   

• Services inflation continues to be high at 4.9%, but this is the lowest reading in the last 8 months and during this period it has fallen from above 6%. Financial services and other consultancy services are causing most of the spike in services inflation.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 4.9% to 3.9%. This is due to a combination of supply chain issues getting gradually sorted out as well demand tapering amidst slowdown concerns in the US economy.

   

• On a yoy basis, food inflation has also shown a consistent downtrend over last 8 months, so the entire pressure is coming from energy inflation. On a yoy basis, energy inflation remains in the negative, but it has moderated in the last 2 months from -17.5% to -3.6% and this has done most of the damage to the PCE inflation reading.

To sum it up, on the yoy PCE inflation front, the pressure has come from non-durable goods, services and from energy prices. That is not surprising with crude scaling up to $94/bbl.

Break-up of US PCE Inflation for August 2023 (MOM)

The high frequency MOM inflation published by the US Bureau of Economic Analysis (BEA), apart from the yoy inflation, captures the short term trends and shifts more effectively. It is also less vulnerable to the base effect. Here is a look at the high frequency PCE inflation on a MOM basis for last 8 months. We also look at the components of MOM inflation change.

Break-up of PCE Inflation (MOM)	Jan-23	Feb-23	Mar-23	Apr-23	May-23	Jun-23	Jul-23	Aug-23
Headline PCE Inflation (Month on Month)	0.6	0.3	0.1	0.3	0.1	0.2	0.2	0.4
Goods	0.5	0.2	-0.2	0.3	-0.1	-0.1	-0.3	0.8
Durable goods	0.2	-0.2	-0.1	0.1	0.2	-0.4	-0.7	-0.3
Nondurable goods	0.7	0.4	-0.3	0.4	-0.3	0.1	0.0	1.4
Services	0.6	0.4	0.3	0.3	0.2	0.3	0.5	0.2
Addenda:
Core PCE excluding food and energy	0.5	0.4	0.3	0.3	0.3	0.2	0.2	0.1
Food	0.4	0.2	-0.2	0.0	0.2	-0.1	0.2	0.2
Energy goods and services	1.9	-0.5	-3.7	0.8	-3.8	0.6	0.1	6.1

Data Source: US Bureau of Economic Analysis (BEA)

The above table givers a break-up of MOM PCE inflation for last 8 months. Firstly, it classifies the PCE inflation into goods and services inflation. Secondly, it classifies PCE inflation into the 3 core headers of food inflation, energy inflation and core inflation; and all these variables are captured on a MOM basis. Here are the key takeaways.

• The headline PCE inflation has been on a rising trend since June 2023, and has touched a 7-month high of 0.4% in August. That shows that there is a lot of pressure exerted on PCE inflation from short term macro adjustments. 

   

• PCE inflation for goods has been positive at 0.8% MOM for August 2023. It has shown a bounce from negative goods PCE inflation in the last 3 months. However, a more interesting trend emerges when the goods inflation of 0.8% is broken up.

   

• The goods inflation components actually show a contrasting trend. For example, inflation in durable goods is negative at -0.3%. However, the inflation in non-durable goods stands at 1.4%, which is the highest level in last 8 months. It is hard to miss this dichotomy within the goods basket itself.

   

• Services inflation continues to be high at 0.2% MOM; and it has remained in the positive territory for the last 8 months in succession. One of the segments of the US economy that has contributed to consumer inflation in a big way is the consumption of services. The trend gets pronounced as services dominate the US economy.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 0.5% to 0.1% on a MOM basis. This is due to supply chain issues getting resolved and demand tapering amidst slowdown concerns in the US and the global economy.

   

• Interestingly, MOM food inflation is up in the last 2 months showing a subtle uptrend. But the real MOM pressure is, obviously, coming from the energy prices. The MOM energy inflation spiked to 6.1% in August, indicating where most of the pressure on PCE inflation is emanating from.

In a nutshell, the high frequency MOM PCE inflation front also draws similar inferences like the YOY inflation. Most of the pressure on the headline inflation is coming from higher energy prices. Core inflation is clearly tapering, while food inflation continues to see pressure. But the real challenge for the US economy remains inflation in services.

 

How will the Fed interpret this data, and what it means for India?

From the Fed perspective, this is ratification of its broadly hawkish stance, which the likes of Jerome Powell and Michelle Bowman have been consistently hinting at. Fed was awaiting the PCE inflation data, and after the pause in September, a rate hike in November 2023 almost looks inevitable. After all, the Fed has to not just manage inflation but inflation expectations too. And the spike in yoy and MOM inflation is not good news for inflation expectations. For the Fed, the second estimate of GDP at 2.1% is better than expected and the full year GDP has been upgraded by more than 100 bps. The higher PCE inflation and solid growth and labour data only go to reassure the Fed that they can hike rates further without worrying overtly about a hard landing. 

There are key takeaways for India. Firstly, RBI has shifted out of inflation focus into growth focus with the sole assumption that the lag effect of rate hikes should work. Inflation may be rising in India, but strong US growth is reassuring about the global growth engine. Both the US and India are now away from their inflation targets, but unwilling to give up on growth. So monetary convergence will happen by default. The only concern is that RBI has kept rates steady for too long. October policy may hold the key for the RBI.