US PCE inflation for January 2024 tapers further to 2.4%

26 Mar 2024 , 02:14 PM

January 2024 PCE inflation tapers by 20 bps to 2.4%

For the month of January 2024, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation at 2.4%. That is a full 20 bps lower than in December 2023, and the glide path towards the 2% inflation target has been relentlessly in progress. The January 2024 inflation is a full 100 bps lower than September 2023. In, fact, if you look at the movement of PCE inflation since May 2023, it is sharply down 160 bps. The lag effect of the rate hikes is working,  even as the Fed has already paused on rate hikes.

Even as the headline PCE inflation tapered to 2.4%, the core PCE inflation is further down from 2.9% to 2.8%. This is a clear indication of supply chain constraints starting to get normalized. In fact, core PCE inflation has fallen 60 bps over the last 3 months and a full 190 bps since May 2023. For January 2024, core inflation was marginally lower, energy inflation sharply down and food inflation was actually higher on a yoy basis.

Headline PCE inflation tapers to 2.4%; core PCE lower at 2.8%

The fall in PCE inflation has been progressive; which is evident if you look at the time series data. Between April 2023 and January 2024; the headline PCE inflation fell 200 bps from 4.4% to 2.4%, while core PCE inflation also fell by 200 bps from 4.8% to 2.8%.

Month	Headline PCE Inflation	Core PCE Inflation
May 2023	4.0%	4.7%
June 2023	3.2%	4.3%
July 2023	3.3%	4.2%
August 2023	3.3%	3.7%
September 2023	3.4%	3.6%
October 2023	3.0%	3.4%
November  2023	2.7%	3.2%
December 2023	2.6%	2.9%
January 2024	2.4%	2.8%

Data Source: Bureau of Economic Analysis (US)

The headline inflation is an aggregate of the core inflation, food inflation and energy inflation. In fact, the purpose of taking the core inflation out of the calculations is that it tends to be more structural in nature. On the other hand, food and energy tend to be more cyclical. Also, food inflation and energy inflation are amenable to policy response, whereas in the case of core inflation, the policy response options are limited.

Why PCE inflation fell by 20 bps in January 2024?

For the month of January 2024, the yoy PCE inflation came in lower by 20 bps at 2.4%. The glide path is a clear signal that PCE inflation is moving towards the Fed target of 2%. Here is how the price break-up for the month looks. For instance, the prices for services increased 3.9% while the prices of goods fell -0.5%. That has been a standard trend in recent months. 

Services inflation is lower than previous month, but at 3.9%, it continues to be the sticky point. On the other hand, there has been some let up in goods inflation in January 2024, as it moved from 0.0% to -0.5%. Also, if you look at core inflation (excluding food and energy), it came in lower at 2.8% in January 2024. Food inflation was higher by 1.4% while energy prices decreased by 4.9%.

The MOM (month-on-month) PCE inflation is the high-frequency indicator of prices. For the month of January 2024, the headline PCE inflation has trended higher at 0.3% while the core PCE inflation has trended up by 0.4%. Within the overall PCE basket, services inflation increased 0.6% while goods inflation fell by -0.2%. The MOM inflation data indicates that; despite the fall in PCE inflation, the short term pressures are still there.

How personal incomes panned out in January 2024?

The PCE inflation is important for two reasons. Firstly, it is announced towards the end of the month, so it covers more data points compared to consumer inflation announced in the middle of the month. Secondly, since PCE inflation is reflective of prices from a personal consumption expenditure perspective, the Fed prefers the PCE inflation as the benchmark for deciding on rate action. Here is a quick look at the specific data points.

• Personal income in January 2024 increased by $233.7 billion (1.0% monthly) as per the estimates put out by the BEA.

   

• Disposable personal income (DPI), personal income minus personal taxes, increased $67.6 billion (0.3%) while personal consumption expenditures (PCE) increased by $43.9 billion (0.2%). Despite higher personal incomes, the DPI has fallen this time.

   

• The increase in current-dollar personal income in January 2024 primarily reflected increases in government social benefits, personal income receipts on assets and compensation.

   

• Let us turn to the positive drivers of $43.9 billion increase in personal consumption expenditure for January 2024. There was an increase of $121.0 billion in spending for services and offset by decrease of $77.0 billion spending for goods. 

   

• Within services, the largest contributors to the spike were housing & utilities, financial services, and insurance & healthcare. Within goods, the leading contributor to the decrease were motor vehicles & parts (light trucks), gasoline, prescription drugs and other energy goods.

   

• Personal saving was higher at $779.3 billion in January 2024 and the ratio of personal savings to disposable personal income increased by 10 bps to 3.8%.

Break-up of US PCE Inflation for January 2024 (YOY)

The US Bureau of Economic Analysis (BEA) publishes the PCE inflation on a yoy basis and on MOM basis. Let us first look at the PCE inflation on a yoy basis and look at the break-up.

Break-up of PCE Inflation (YOY)	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24
Headline PCE Inflation (Year on Year)	3.2	3.3	3.3	3.4	3.0	2.7	2.6	2.4
Goods	-0.4	-0.2	0.7	0.9	0.2	-0.1	0.2	-0.5
Durable goods	-0.5	-1.0	-1.9	-2.3	-2.2	-2.1	-2.3	-2.4
Nondurable goods	-0.3	0.2	2.1	2.7	1.6	1.0	1.6	0.5
Services	5.1	5.1	4.7	4.6	4.3	4.2	3.9	3.9
Addenda:
Core PCE excluding food and energy	4.3	4.2	3.7	3.6	3.4	3.2	2.9	2.8
Food	4.7	3.7	3.1	2.7	2.4	1.7	1.4	1.4
Energy goods and services	-17.5	-13.0	-3.5	0.1	-4.6	-5.0	-1.7	-4.9

Data Source: US Bureau of Economic Analysis (BEA)

The above table classifies inflation into goods and services inflation; and also classifies the inflation into food, energy, and core inflation. Here are major takeaways.

• Headline PCE inflation has shown a secular downward trend since April 2023 and has fallen 200 bps till January 2024. Since September 2023, headline PCE is down 100 bps.

   

• PCE inflation for goods slumped from 0.2% to -0.5%, but it is the break-up of the goods inflation that is more interesting. 

   

• Within goods, negative inflation in durable goods deepened from  -2.3% to -2.4% while the inflation in non-durable goods fells sharply from 1.6% to 0.5%. 

   

• For January 2024, the services inflation was flat at 3.9%. However, the services inflation is down a full 170 bps from a high of 5.6% in April 2023.

   

• Core PCE inflation yoy has shown a consistent downtrend since June 2023; falling 150 bps from 4.3% to 2.8% as supply chain conditions have eased globally. 

   

• On a yoy basis, PCE food inflation is flat at 1.4%, but is sharply down by 330 basis points from a level of 4.7% in June 2023. 

   

• Energy inflation deepened further into the negative from -1.4% to -4.9% as the prices of gasoline and fuel eased amidst concerns over weak demand globally.

To sum up, the yoy PCE inflation in durable and non-durable goods is trending lower. Interestingly, energy inflation continues to trend lower, despite the evolving geopolitical risks from the Red Sea crisis.

Break-up of US PCE Inflation for January 2024 (MOM)

The table below captures the high frequency month-on-month (MOM) inflation published by the US Bureau of Economic Analysis (BEA), with the granular break-up.

Break-up of PCE Inflation (MOM)	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24
Headline PCE Inflation (Month on Month)	0.2	0.1	0.4	0.4	0.0	0.0	0.1	0.3
Goods	-0.1	-0.3	0.8	0.2	-0.3	-0.6	-0.2	-0.2
Durable goods	-0.4	-0.7	-0.3	-0.1	-0.2	-0.5	-0.5	0.2
Nondurable goods	0.1	0.0	1.4	0.3	-0.3	-0.6	-0.1	-0.4
Services	0.3	0.3	0.1	0.5	0.2	0.3	0.3	0.6
Addenda:
Core PCE excluding food and energy	0.2	0.1	0.1	0.3	0.2	0.1	0.1	0.4
Food	-0.1	0.2	0.3	0.3	0.2	-0.1	0.0	0.5
Energy goods and services	0.6	0.1	6.1	1.7	-2.5	-1.8	-0.3	-1.4

Data Source: US Bureau of Economic Analysis (BEA)

Like the YOY inflation, even the MOM PCE inflation data is classified into goods and services inflation as well as food, fuel, and core inflation. Here are some key takeaways.

• After being on a rising trend between April and September, the MOM PCE inflation had fallen to 0.0% in October and November. In January 2024, it is up at 0.3%.

   

• PCE inflation for goods stayed negative at -0.2% MOM for January 2024, but shallower than -0.6% in November 2023. Goods inflation for durables has been higher at 0.2%, while non-durables inflation weakened from -0.1% to -0.4%.

   

• Services inflation MOM is sharply up from 0.3% in December 2023 to 0.6% in January 2024; indicating that pricey services are still driving a lot of short term PCE inflation.

   

• Core PCE inflation, on a high frequency MOM basis, is sharply up from 0.1% last month to 0.4% in January 2024; showing signs of supply chains hit by the Red Sea crisis. 

   

• While the food inflation on MOM basis surged from 0.1% to 0.5%, the energy inflation weakened further from -0.3% to -1.4% in January 2024. 

Broadly, there are some common themes emerging from the short term and the long term indicators. Food is putting a good deal of incremental pressure on prices. Oil inflation is trending lower, which is surprising. However, core inflation is showing divergence. It is lower on a secular basis, but short term pressures are visible; and that can be attributed to the supply chain constraints caused by the Red Sea crisis.

How will the Fed and the RBI react to January 2024 PCE inflation 

With both the US inflation readings out, there are mixed signals coming out for the Fed. The consumer inflation is showing pressure since the inflation was higher than expected. However, PCE inflation appears to be firmly moving towards the Fed target of 2.0%. Remember, the Fed takes the PCE inflation as the key indicator to decide on rates. Will that trigger early rate cuts by the Fed. For that, one must closely read the speech delivered by governor Christopher Waller. According to Waller, aggressive rate cuts are normally an outcome of a major crisis or a visible slowdown in the economy. Currently, the US is growing its GDP at above 3.2%, despite relatively high rates of interest. His contention is that there is no tearing hurry to cut rates at this juncture and the Fed would rather save its arsenal for a future date. Clearly, rate cuts are ruled out in the first half and Fed may consider rate cuts only in the second half of 2024.

For the RBI, the US GDP is a bigger indicator than the US inflation. Robust US GDP growth means; India’s export engine and its US dependency gets a kicker. That is something of relevance to Indian markets. Of course, the RBI would be watching the Fed rate action, but that would be more from the perspective of avoiding any major monetary divergence. For now, the RBI has a case to cut rates. The repo rates are a full 135 basis points above the pre-COVID rates and the real rates at above 2% are inordinately high. However, the RBI has more pragmatic considerations. Unlike the US and other developed economies, the Indian economy is a lot more vulnerable to food and energy inflation. Imported inflation is another potent risk for India. RBI may prefer to wait till the time the new government is in place and the full budget is presented by the new government in July 2024. That would give the RBI, the legitimate grounds for taking a call on rate cuts, with more data points also coming in. For now, the lower inflation and higher GDP growth in the US is surely a reason for a global “feel good” factor.