US PCE inflation for December 2023 flat at 2.6%

28 Jan 2024 , 06:49 AM

December 2023 PCE inflation flat at 2.6%

For the month of December 2023, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation totally flat at 2.6%. That is exactly at the same level as in November 2023, which is a good signal that the PCE inflation is finally stabilizing in its journey towards the 2% target. The December 2023 inflation is 80 bps lower than September. In, fact, if you look at the movement of PCE inflation since April 2023, then the PCE inflation in this period is sharply down 180 bps; and 140 bps down since May 2023.

However, even as the headline PCE inflation has stayed flat at 2.6%, the core PCE inflation is actually down 30 bps from 3.2% to 2.9%, a clear indication of supply chain constraints now under control. In fact, core PCE inflation has fallen 70 bps over the last 3 months and a full 190- bps since April 2023. For December 2023, food and core inflation are lower, so the pressure is coming from energy inflation, amidst the worsening Red Sea crisis

Headline PCE inflation flat at 2.6%; core PCE lower at 2.9%

The fall in PCE inflation has been progressive and it becomes apparent if you look at the time series data. For instance, between April 2023 and November 2023; the headline PCE inflation fell from 4.4% to 2.6%, while core PCE inflation fell from 4.8% to 2.9%.

Month	Headline PCE Inflation	Core PCE Inflation
April 2023	4.4%	4.8%
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	2.9%	3.4%
November  2023	2.6%	3.2%
December 2023	2.6%	2.9%

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, while food and energy inflation tend to be more cyclical in nature. For December, the food inflation is also lower, so pressure is coming from energy inflation.

What triggered PCE inflation shift in December 2023?

For the month of December, the yoy PCE inflation came in flat at 2.6%. The stability is a clear signal of the PCE inflation moving towards the eventual Fed target of 2%. Here is how the price break-up for the month looks. For instance, the prices for services increased 3.9% percent and prices for goods was flat. 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 pain point. On the other hand, the pressure, this time, has come from goods inflation which moved up from -0.3% to 0.0%. Also, if you look at core inflation (excluding food and energy), it came in sharply lower at 2.9% in December, compared to the year ago period. However, pressure came from energy inflation, which picked up from -6.0% to -2.2% in December.

The MOM (month-on-month) PCE inflation is the high-frequency indicator of prices. While November PCE MOM inflation was negative at -0.1%, December MOM PCE inflation is up at 0.2%, hinting at short term pressures. Here again the incremental pressure has come from goods and not from services. In terms of product categories, MOM core and food PCE inflation are higher, while MOM energy inflation has shot up from -2.7% to +0.3%.

How personal incomes panned out in December 2023?

One reason the Fed prefers PCE inflation over consumer inflation as a price indicator is that the PCE focuses on inflation from a personal consumption expenditure (PCE) perspective. Here is a quick look at the specific data points.

• Personal income in December 2023 increased by $60.0 billion (0.3% monthly) as per the estimates put out by the BEA.

   

• Disposable personal income (DPI), personal income minus personal taxes, increased $51.8 billion (0.3%) while personal consumption expenditures (PCE) increased sharply by $133.9 billion (0.7%). It surely looks like inflation is pinching where it hurts consumers.

   

• The increase in current-dollar personal income in December 2023 primarily reflected increases in compensation and personal income receipts on assets that were partly offset by a decrease in personal current transfer receipts.

   

• Let us turn to the positive drivers of $133.9 billion increase in personal consumption expenditure for December 2023. There was an increase of $75.6 billion in spending for services and increase of $58.4 billion spending for goods. Goods are the pressure point.

   

• Within services, the largest contributors to the spike were insurance, portfolio management services, investment advisory services, and healthcare. Within goods, the leading contributor to the increase was motor vehicles & parts (light trucks), gasoline, prescription drugs and other energy goods.

   

• Personal saving was lower at $766.7 billion in December 2023 and the ratio of personal savings to disposable personal income reduced by 40 bps to 3.7%.

Break-up of US PCE Inflation for December 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. Here are some of the key drivers of this inflation shift.

Break-up of PCE Inflation (YOY)	May-23	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23
Headline PCE Inflation (Year on Year)	4.0	3.2	3.3	3.3	3.4	2.9	2.6	2.6
Goods	1.2	-0.4	-0.2	0.7	0.9	0.2	-0.3	0.0
Durable goods	0.4	-0.5	-1.0	-1.9	-2.3	-2.2	-2.1	-2.3
Nondurable goods	1.6	-0.3	0.2	2.1	2.7	1.6	0.7	1.3
Services	5.4	5.1	5.1	4.7	4.6	4.3	4.1	3.9
Addenda:
Core PCE excluding food and energy	4.7	4.3	4.2	3.7	3.6	3.4	3.2	2.9
Food	5.9	4.7	3.7	3.1	2.7	2.4	1.8	1.5
Energy goods and services	-12.3	-17.5	-13.0	-3.5	0.1	-4.7	-6.0	-2.2

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 showed a falling trend from April to June 2023 and again from September to November 2023. Since May, PCE inflation (yoy) has fallen 140 bps.

   

• PCE inflation for goods bounced back from -0.3% to +0.0%, but it is the break-up of the goods inflation that is more interesting. 

   

• Within goods, negative inflation in durable goods deepened from  -2.1% to -2.3% while the inflation in non-durable goods spiked from 0.7% to 1.3%. 

   

• December 2023 services inflation tapered further to 3.9% from 4.1% in November. It has fallen 170 bps from a high of 5.6% in April 2023.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 4.7% to 2.9% as supply chain conditions have sharply improved globally. 

   

• On a yoy basis, PCE food inflation at 1.5%, is lower than 1.8% in November, and is down from a high of 6.9% in April 2023. 

   

• Energy inflation was the real trigger leading to flat PCE inflation. While energy inflation is still in the negative, it hardened from -6.0% to -2.2% in December over November 2023.

To sum up, on the yoy PCE inflation front, inflation in non-durable goods is sharply higher, while services is tapering. Above all, food and core inflation are all inching lower; but the pressure continues to come from energy inflation amidst the Red Sea shipping crisis.

Break-up of US PCE Inflation for December 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. 

Break-up of PCE Inflation (MOM)	May-23	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23
Headline PCE Inflation (Month on Month)	0.1	0.2	0.1	0.4	0.4	0.0	-0.1	0.2
Goods	-0.1	-0.1	-0.3	0.8	0.2	-0.3	-0.7	-0.2
Durable goods	0.2	-0.4	-0.7	-0.3	-0.1	-0.3	-0.4	-0.4
Nondurable goods	-0.3	0.1	0.0	1.4	0.3	-0.3	-0.9	-0.1
Services	0.2	0.3	0.3	0.1	0.5	0.2	0.3	0.3
Addenda:
Core PCE excluding food and energy	0.3	0.2	0.1	0.1	0.3	0.1	0.1	0.2
Food	0.2	-0.1	0.2	0.3	0.3	0.2	-0.1	0.1
Energy goods and services	-3.8	0.6	0.1	6.1	1.7	-2.7	-2.7	0.3

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 -0.1% in November. In December, it has bounced back to 0.2%.

   

• PCE inflation for goods stayed negative at -0.2% MOM for December 2023, but shallower than -0.7% in November 2023. Goods inflation for durables has been flat while that of non-durables hardened from -0.9% to -0.1%.

   

• Services inflation MOM had fallen sharply from 0.5% in September 2023 to 0.2% in October 2023; however, November and December have stayed steady at 0.3%.

   

• Core PCE inflation, on a high frequency MOM basis, is slightly higher at 0.2% in December 2023 compared to 0.1% in November 2023. 

   

• While the food inflation and energy inflation on a yoy basis were lower in December compared to November, the MOM inflation shows pressure on both fronts. For instance, the food inflation on an MOM basis has hardened from -0.1% to +0.1% between November and December 2023. During the same period, the energy inflation on an MOM basis has also hardened from -2.7% to +0.3%.

The high frequency MOM PCE inflation reading slightly diverges from the reading on the YOY inflation. In the case of yoy inflation, there is softening of food and core inflation, while energy inflation has hardened. However, on a MOM high frequency basis; food inflation, core inflation and energy inflation have hardened. That is indicative of possible pressure on the PCE inflation in next few months.

December PCE Inflation – What it means for the Fed

It may be recollected that the Fed December statement had clearly shifted its focus to rate cuts from rate hikes. Hawkishness may not be out, but it is much lower on the pecking list for the Fed. In fact, Fed has committed to about 175 bps of rate cuts by the end of 2025. With PCE inflation steadily moving towards the 2% mark, it should induce the Fed to now offer a time table for rate cuts in a more explicit manner. It remains to be seen if the latest PCE reading shifts the Fed from “Higher for longer” mode into rate cut mode. 

The Fed will take solace from the first advance estimate of Q4 GDP data announced on Thursday. At 3.3%, the GDP growth estimate for Q4, was nearly 110-130 bps higher than the street estimates. That has two implications. Firstly, it means that the concerns of hard landing may be entirely overblown. Secondly, it also means that strong GDP growth and spending could trigger inflation in future, but the Fed may now prefer to take a data driven approach; dealing with price stability as it evolves.

How will the RBI interpret the US PCE inflation data?

There are some interesting takeaways for the RBI from the dual data points from the US. Firstly, Q4 US GDP was sharply higher than street expectations at 3.3%, while PCE inflation has been flat amidst a sharp fall in core PCE inflation. While the RBI has not hiked repo rates since February 2023, it is yet to embark on rate cuts. The RBI is obviously looking for cues from the Fed, especially on how they phase the rate cut program. 

RBI has another reason to think about rate cuts. The real rate of interest at 2% is already quite high and it is adding to cost of funds for Indian companies. While the RBI has not been too explicit about dovishness, the February 2024 monetary policy (immediately after the Interim Budget), may see a shift in stance. The time for dovishness may just about be ripe.