US PCE inflation for October 2023 falls sharply to 3.0%

1 Dec 2023 , 09:18 AM

PCE inflation falls by 40 bps to 3.0% in October 2023

For the month of October 2023, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation at 3.0%; a full 40 bps lower than the 3.4% reported in September 2023. This is the first time in 2023 that the headline PCE inflation has come in at a level of 3.0%. Of course, one can argue that it is still 100 bps away from the 2% target, but it is surely on track for now. The PCE inflation (based on personal consumption expenditure) is used by the Fed as the benchmark to decide on rate action. While the PCE inflation normally tends to move in tandem with the consumer inflation, the US Fed has always preferred this measure over the routine consumer inflation that is reported by the Bureau of Labour Statistics (BLS) in the middle of each month. In recent months, the PCE inflation has approximately followed the same trend as the consumer inflation. 

A quick background on the essence of PCE inflation. Each 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 by the Bureau of Economic Analysis towards the end of the month for the previous month. The US BEA has just announced the PCE inflation for October 2023, sharply lower by 40 bps at 3.0%. Let us quickly look at the time series trend of PCE inflation and core PCE inflation (excluding food and energy).

PCE inflation for October 2023 lower at 3.0%; core PCE at 3.5%

In fact, June 2023 was the month when the PCE inflation downtrend ended at 3% (later revised to 3.2%). That bounce can be largely attributed to a spike in fuel prices in the aftermath of crude prices in the Brent market going up from $71/bbl to $96/bbl. Since then, the inflation in July spiked to 3.3% (later revised to 3.4%) and to 3.5% in August 2023 (later revised lower to 3.4%). September 2023 PCE inflation has come in flat at 3.4%, once again; while October PCE inflation has come in decisively lower at 3.0%. Like CPI inflation in the US, even the PCE inflation showed a rising trend since June 2023, before tapering in October. The table captures PCE inflation (yoy) over last 8 months.

Month	Headline PCE Inflation	Core PCE Inflation
March 2023	4.2%	4.8%
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	3.4%	3.8%
September 2023	3.4%	3.7%
October 2023	3.0%	3.5%

Data Source: Bureau of Economic Analysis (US)

The above table shows the two readings of PCE inflation that the Fed looks at closely. The headline PCE inflation in the second column is the overall price hike across all the three categories; viz. food, energy, and core inflation. The core PCE inflation, on the other hand, captures the residual inflation excluding food and energy. Core inflation tends to be sticky and structural since, while food and energy inflation tend to be more cyclical in nature. It is this structural nature of core inflation that makes it important from a policy perspective as it can be tough to contain with directed policy measures. Central banks worry about core inflation as it is less amenable to policy adjustments. Food and energy inflation are about demand and supply factors and government policies can be used to address these.

Core inflation came back into focus in the aftermath of the COVID pandemic as supply struggled to keep up with demand amidst supply chain disruptions. This triggered an all-round spike in core inflation. Core inflation in the aftermath of COVID was a classic case of supply struggling to keep pace with the surge in demand. Since March 2023, core PCE inflation has tapered from 4.8% to 3.5%. OF course, for the Fed, the target is 2% headline PCE inflation and 2% core PCE inflation; and that does look some distance away.

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

The US Bureau of Economic Analysis (BEA) publishes the PCE inflation on a yoy basis as part of its report. Let us first look at PCE inflation on a yoy basis for the last 8 months to decipher a trend. We also look at the key drivers of this inflation shift.

Break-up of PCE Inflation (YOY)	Mar-23	Apr-23	May-23	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23
Headline PCE Inflation (Year on Year)	4.4	4.4	4.0	3.2	3.4	3.4	3.4	3.0
Goods	2.0	2.2	1.2	-0.4	-0.2	0.7	0.9	0.2
Durable goods	0.4	0.5	0.4	-0.5	-1.0	-1.9	-2.3	-2.2
Nondurable goods	2.8	3.1	1.6	-0.3	0.2	2.1	2.7	1.6
Services	5.7	5.6	5.4	5.1	5.2	4.8	4.7	4.4
Addenda:
Core PCE excluding food and energy	4.8	4.8	4.7	4.3	4.3	3.8	3.7	3.5
Food	7.9	6.9	5.9	4.7	3.7	3.1	2.7	2.4
Energy goods and services	-7.6	-5.7	-12.3	-17.5	-13.0	-3.5	0.0	-4.8

Data Source: US Bureau of Economic Analysis (BEA)

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

• The headline PCE inflation showed a falling trend from March to June 2023. However, after the 20 bps bounce in July due to the oil price impact, the PCE inflation had been static at 3.4% till September. In October, it has fallen sharply by 40 bps to 3.0%.

   

• PCE inflation for goods had increased from 0.7% in August 2023 to 0.9% in September 2023; but has since tapered to 0.2% in October. However, an interesting trend emerges when the goods inflation of 0.9% is broken up.

   

• Goods inflation components actually show a contrasting trend. For example, inflation in durable goods is -2.2%. However, the inflation in non-durable goods stands at 1.6%. Compared to September, October saw higher durable goods inflation but lower non-durable inflation on a yoy basis.

   

• October 2023 services inflation taper to 4.4% from 4.7% in September. Services inflation has been consistently falling from a high of over 6% in the early part of the year as most of the inflation in the US has been concentrated in the services sector.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 4.8% to 3.5%. This is due to a combination of supply chain issues getting addressed as well as the demand tapering amidst slowdown concerns in the US economy.

   

• On a yoy basis, food inflation at 2.4% has also shown a consistent downtrend over last 8 months. Unlike the previous few months, when energy drove up core inflation, the month of October 2023 has also seen energy inflation dipping into the negative zone.

To sum it up, on the yoy PCE inflation front, inflation in non-durable goods and services is tapering. Above all, the fuel inflation has stopped being a macro thorn in the flesh.

 

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

The high frequency month-on-month (MOM) inflation published by the US Bureau of Economic Analysis (BEA), is an additional data point (apart from yoy inflation) that captures the short term high frequency trends in inflation. The data is captured in the table below.

Break-up of PCE Inflation (MOM)	Mar-23	Apr-23	May-23	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23
Headline PCE Inflation (Month on Month)	0.1	0.3	0.1	0.2	0.2	0.4	0.4	0.0
Goods	-0.2	0.3	-0.1	-0.1	-0.3	0.8	0.2	-0.3
Durable goods	-0.1	0.1	0.2	-0.4	-0.7	-0.3	-0.1	-0.3
Nondurable goods	-0.3	0.4	-0.3	0.1	0.0	1.4	0.3	-0.3
Services	0.3	0.3	0.2	0.3	0.4	0.2	0.5	0.2
Addenda:
Core PCE excluding food and energy	0.3	0.3	0.3	0.2	0.2	0.1	0.3	0.2
Food	-0.2	0.0	0.2	-0.1	0.2	0.3	0.3	0.2
Energy goods and services	-3.7	0.8	-3.8	0.6	0.1	6.1	1.7	-2.6

Data Source: US Bureau of Economic Analysis (BEA)

The above table provides a break-up of MOM PCE inflation for last 8 months. Like the YOY inflation, even the MOM inflation data is classified into goods and services inflation as well as food, fuel, and core inflation. Here are some key takeaways.

• The MOM PCE inflation had been on a rising trend since May 2023, and had touched a 7-month high of 0.4% in August and September. However, in October 2023, the MOM headline PCE inflation is down to 0.00%, eliminating short term pressures.

   

• PCE inflation for goods turned negative at -0.3% MOM for October 2023, compared to positive goods inflation in the last two months. The break-up of goods inflation shows that durable inflation and non-durable inflation were at -0.3% for October 2023. This is the first time last 6 months when durable goods and non-durable goods have not shown a contrasting trend, with both of them in negative zone in October 2023. 

   

• Services inflation MOM has fallen sharply from 0.5% in September 2023 to 0.2% in October 2023. That is effectively back to the August levels of service inflation. Post COVID pandemic, inflation in the US economy has been largely triggered by the consumption of services, as higher income levels mean people are willing to pay more for services. The trend gets pronounced as services dominate the US economy.

   

• Core PCE inflation MOM has fallen back to 0.2% in October 2023, after a minor spike to 0.3% in September 2023. This is due to supply chain issues resurfacing amidst the rising geopolitical risks. However, October has seen many of these risks getting subdued.

   

• Interestingly, MOM food inflation is back at 0.2% after scaling to 0.3% in recent months. On the MOM energy inflation front, It has sharply dipped from 1.7% in September 2023 to -2.6% in October 2023. Clearly, with the oil prices in the Brent market and the WTI market retreating from higher levels, that was an obvious outcome. The latest supply restriction of 1 million bpd is likely to have only a limited impact on PCE inflation.

In a nutshell, the high frequency MOM PCE inflation front also draws similar inferences like the YOY inflation. There has been an all-round tapering of inflation across goods and services, with energy driving most of the fall in PCE inflation in October 2023.

How will Fed interpret PCE inflation, and some key takeaways for India?

Fed would still hold on to its argument that the PCE headline inflation is still 100 bps away from the long term target of 2%. The more hawkish voices in the Fed like Jerome Powell and Michelle Bowman were not too impressed by the sharp fall in consumer inflation in mid-November; so PCE inflation is unlikely to be any different. However, what this data could trigger is that the Fed would now be willing to sustain its policy of “Higher for longer” with a greater degree of confidence, without really deliberating on rate hikes. Having said that, rate cuts still look like a remote possibility in the near future; with the inflation rate still way about the eventual Fed target of 2%. The second estimate of US Q3GDP at 5.2% will impel the Fed to also look at the growth factor. 

There are key takeaways for India. Firstly, RBI has shifted out of inflation focus into growth focus with the sole assumption that lag effect of rate hikes will do the job. Indian economy can take comfort from the fact that the headline inflation in October 2023 is just about 87 bps away from their eventual inflation target of 4%. Both the US and India are away from their inflation targets, but unwilling to give up on growth. For the RBI, the next cues on their plan of action will be visible in the upcoming RBI monetary policy on December 08, 2023.