US PCE inflation for April 2024 rock steady at 2.7%

3 Jun 2024 , 10:24 AM

WHAT HELD  PCE INFLATION ROCK STEADY IN APRIL 2024?

In the last few months, the PCE inflation arrested its downward journey and has been gradually trending higher. From a low of 2.4% in January 2024, the PCE headline inflation has picked up to 2.7% in April 2024. Between March 2024 and April 2024, the PCE inflation has remained steady at the same level. However, the underlying story is quite revealing. The core inflation was steady and the food inflation was lower compared to March. However, the spike came in energy inflation. That is not too surprising as oil prices have gone up sharply in recent months due to the Red Sea crisis and global oil trade being impacted. At the same time, even as American oil output has risen to record levels, even the demand for gasoline has been growing rapidly. The problem really lies in energy inflation.

When we talk of PCE inflation, the most important point is the implications for Fed policy. For example, the Fed relies on PCE inflation as a guiding data point and not the consumer inflation that is published by the Bureau of Labor Statistics (BLS) in the middle of each month. However, the consumer inflation does set the tone for PCE inflation. The PCE inflation, as the name suggests, is based on personal consumption expenditure. Hence it looks at inflation from the spending side rather than the product side and hence from a policy perspective it fits in better. For now, the Fed has guided for the first rate cut in September and possibly two rate cuts in 2024. However, that would predicate on the headline PCE inflation giving unambiguous signals of moving towards the 2% target.

PCE HEADLINE INFLATION VERSUS PCE CORE INFLATION

The good news is that PCE inflation and the PCE core inflation are is still distinctively lower from a longer term perspective. The only concern is that the falling trend may have been reversed. Between August 2023 and April 2024; the headline PCE inflation fell 60 bps from 3.3% to 2.7%, while core PCE inflation fell by 90 bps from 3.7% to 2.8%.

Month	Headline PCE Inflation	Core PCE Inflation
August 2023	3.3%	3.7%
September 2023	3.4%	3.6%
October 2023	2.9%	3.4%
November  2023	2.7%	3.2%
December 2023	2.6%	2.9%
January 2024	2.4%	2.9%
February 2024	2.5%	2.8%
March 2024	2.7%	2.8%
April 2024	2.7%	2.8%

Data Source: Bureau of Economic Analysis (US)

If you look at the above table, both headline PCE inflation and core PCE inflation have been progressively falling. However, that trend appears to have been arrested in the last 3 months. While core inflation has stagnated due to the reduced incremental benefits of supply chain constraints easing, headline PCE inflation has been hit badly by higher oil and energy prices. That was, however, expected. In the last 1 year, core inflation was consistently falling as the supply chain constraints imposed by the pandemic were getting rectified. It was the sold driving factor of lower PCE inflation. However, those gains have saturated as is evident from the core PCE inflation in a range of 10 bps for the last 5 months in a row. To add to the problems, the Red Sea crisis and the disruption of trade routes have opened up the prospects of core inflation spiking once again on a sustained basis.

PERSONAL INCOME STORY FOR APRIL 2024?

PCE inflation matters in 2 ways. Firstly, it is announced towards the end of the month, so it covers more data points than CPI inflation. Secondly, PCE inflation reflects  prices from a personal consumption expenditure (PCE) perspective. Incidentally, the Federal Reserve uses PCE inflation as the benchmark for rate action. Here are some key April 2024 data points.

• Personal income in April 2024 increased by $65.3 Billion (0.3% monthly) as per the estimates put out by the BEA.
• Disposable personal income (DPI), personal income minus personal taxes, increased $40.2 Billion (0.2%) while personal consumption expenditures (PCE) increased by $39.1 Billion (0.2%). Compared to last month, the DPI and the PCE have tempered, which is positive for the Fed, if it is contemplating the first rate cut in September 2024.
• The increase in current-dollar personal income in April 2024 primarily reflected increases in compensation, personal income receipts on assets, and government social benefits to individuals.
• Let us turn to the positive drivers of $39.1 Billion increase in personal consumption expenditure for April 2024. There was an increase of $49.1 Billion in spending for services; partly offset by an increase of $10.0 Billion spending for goods.
• Within services, the largest contributors to the spike were housing & utilities, healthcare (both out-patient and hospitals), financial services, and hospitals. This was partially offset by decrease in transportation services.
• Within goods, the leading contributor to the decrease were spending for recreational goods and vehicles, as well as other non-durable goods.
• Personal saving was higher at $744.5 Billion in April 2024 and the ratio of personal savings to disposable personal income increased by 40 bps to 3.6%.

BREAK-UP OF US PCE INFLATION (YOY) FOR APRIL 2024

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 with granular break-up.

Break-up of PCE Inflation (YOY)	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24	Mar-24	Apr-24
Headline PCE Inflation (Year on Year)	3.4	2.9	2.7	2.6	2.5	2.5	2.7	2.7
Goods	0.9	0.2	-0.1	0.2	-0.5	-0.2	0.1	0.1
Durable goods	-2.3	-2.2	-2.1	-2.3	-2.4	-2.0	-1.9	-2.2
Nondurable goods	2.7	1.6	1.0	1.6	0.5	0.8	1.3	1.4
Services	4.6	4.3	4.1	3.9	4.0	3.8	4.0	3.9
Addenda:
Core PCE excluding food and energy	3.6	3.4	3.2	2.9	2.9	2.8	2.8	2.8
Food	2.7	2.4	1.7	1.4	1.4	1.3	1.5	1.3
Energy goods and services	0.1	-4.6	-5.0	-1.7	-4.9	-2.3	2.6	3.0

Data Source: US Bureau of Economic Analysis (BEA)

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

• Headline PCE inflation has shown a secular downward trend since April 2023. Between September 2023 and April 2024, the PCE inflation has fallen a full 70 bps to 2.7%.
• PCE inflation for goods was steady in April 2024 at 0.1%, like in March. Within goods, the durable goods dipped deeper into negative from -1.9% to -2.2% while the inflation in non-durable goods hardened marginally from 1.3% to 1.4%. This dichotomy can be explained by the supply chain constraints following the Red Sea crisis.
• For April 2024, the services inflation tapered by 10 bps from 4.0% to 3.9%. Incidentally, 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 from June 2023 till February 2024; falling 150 bps from 4.3% to 2.8%. However, since February 2024, the core PCE inflation has stagnated at 2.8% due to pressure from supply chain constraints.
• On a yoy basis, PCE food inflation is 20 bps lower at 1.3%, but is sharply down by 340 basis points from 4.7% in June 2023. April 2024 food inflation has reverted back to the February 2024 levels, after a brief spike in March.
• Energy inflation appears to the joker in the pack or that one factor adding to inflation pressure on the headline. Between January 2024 and Aril 2024, the PCE energy inflation has rallied from -4.9% to +3.0% (a spike of 790 bps). The energy inflation has been progressively higher in the last 3 months.

Energy inflation remains the weak link. With the situation in the Middle East and West Asia remaining intractable that could be the swing factor for PCE inflation in coming months.

BREAK-UP OF US PCE INFLATION (MOM) FOR APRIL 2024

The table below captures the high frequency month-on-month (MOM) inflation published by the US Bureau of Economic Analysis (BEA), capturing short term trends.

Break-up of PCE Inflation (MOM)	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24	Mar-24	Apr-24
Headline PCE Inflation (MOM)	0.4	0.0	0.0	0.1	0.4	0.3	0.3	0.3
Goods	0.2	-0.3	-0.6	-0.2	-0.2	0.5	0.1	0.2
Durable goods	-0.1	-0.2	-0.5	-0.5	0.2	0.2	0.1	-0.2
Nondurable goods	0.3	-0.3	-0.6	-0.1	-0.4	0.7	0.2	0.5
Services	0.5	0.2	0.3	0.3	0.7	0.3	0.4	0.3
Addenda:
Core PCE ex-(food and energy)	0.3	0.1	0.1	0.2	0.5	0.3	0.3	0.2
Food	0.3	0.2	-0.1	0.0	0.5	0.1	0.0	-0.2
Energy goods and services	1.7	-2.5	-1.9	-0.3	-1.4	2.3	1.2	1.2

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 2023, MOM PCE inflation had fallen to 0.0% in October and November. Between February and April 2024, the number has been flat at 0.3%.
• MOM PCE inflation for goods had fallen sharply from 0.5% to 0.1% in March 2024, but has bounced back to 0.2% in April 2024. Durable goods inflation fell from 0.1% to -0.2%, while non-durables inflation spiked sharply from 0.2% to 0.5%.
• Services inflation MOM edged lower from 0.4% in March 2024 to 0.3% in April 2024; indicating that the geopolitical crisis is hitting goods more than services.
• High frequency Core PCE inflation was lower at 0.2% in April 2024, the MOM food inflation dipped from 0.0% to -0.2%; while energy inflation is flat at 1.2% in April 2024.

While the trend of PCE inflation has been lower, there are signs of PCE inflation stagnating in the last few months. As the Fed had admitted earlier this year, the last mile is always the toughest and it is no different when it comes to interest rates.

TO CUT OR NOT TO CUT RATES; IS THE FED DILEMMA

Typically, a fall in PCE inflation in April 2024, coupled with sobering of energy inflation would have been the perfect setting for the Fed to start cutting rates from September onwards. That would have been the perfect base case for implementing 2-3 rate cuts in year 2024. However, PCE inflation has been flat and core PCE inflation has also been flat, while energy inflation has been the problem area. Obviously, that is likely to make the Fed more cautious about taking up rate cuts any time in the near future. Let us look at the CME Fedwatch probabilities after the PCE inflation data to get a granular picture of rate cut chances.

Fed Meet	325-350	350-375	375-400	400-425	425-450	450-475	475-500	500-525	525-550	550-575
Jun-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	4.4%	95.6%	Nil
Jul-24	Nil	Nil	Nil	Nil	Nil	Nil	0.5%	15.7%	83.8%	Nil
Sep-24	Nil	Nil	Nil	Nil	Nil	0.2%	7.5%	47.0%	45.2%	Nil
Nov-24	Nil	Nil	Nil	Nil	0.1%	2.0%	17.2%	46.6%	34.1%	Nil
Dec-24	Nil	Nil	Nil	Nil	1.2%	10.6%	33.7%	39.6%	15.0%	Nil
Jan-25	Nil	Nil	Nil	0.4%	4.3%	18.3%	35.7%	31.4%	10.0%	Nil
Mar-25	Nil	Nil	0.2%	2.2%	10.8%	26.4%	33.7%	21.4%	5.3%	Nil
Apr-25	Nil	0.1%	0.9%	5.1%	16.0%	28.8%	29.6%	16.0%	3.5%	Nil
Jun-25	Nil	0.5%	3.0%	10.5%	22.3%	29.2%	22.9%	9.9%	1.8%	Nil
Jul-25	0.2%	1.4%	5.9%	15.0%	25.0%	26.8%	17.9%	6.8%	1.1%	Nil

Data source: CME Fedwatch

What do we decipher from the above data and does the Fed look likely to cut rates in September? In fact, the lower that expected Q1 GDP and the flat inflation has made the markets enthusiastic about rate cuts and raised the probabilities. Here are key takeaways.

• The probabilities have moved higher in favour of a rate cut. Now the probability of the first rate cut happening in September 2024 has gone up to 55%, which is higher than last week. But more importantly, the chances of rate hikes have been eliminated.
• What about the situation at the end of 2024? By December 2024, there is a 46% probability that there would be two rate cuts. However, these could change drastically once the Fed actually cuts rates in September this year.
• What about the situation by mid-2025 i.e., by July 2025. By the middle of 2025, there is a 75% probability that there would be 3 rate cuts while there is a strong 48% probability of 4 rate cuts.

The CME Fedwatch does believe that rate cuts would positively happen and places a high probability of 2 rate cuts by end of 2024 and 4 rate cuts by mid-2025. We have to wait and watch, how the inflation, labour market and GDP growth situation pans out!