US PCE inflation for February 2024 inches up to 2.5%

31 Mar 2024 , 10:21 AM

FEBRUARY 2024 PCE INFLATION UP 10 BPS TO 2.5%

That was broadly expected, as the consumer inflation announced by the US BLS in the middle of March had shown pressure on energy inflation. It was precisely the energy inflation that triggered the February 2024 PCE inflation to move up by 10 bps to 2.5%. The February PCE inflation reading is a full 10 bps higher than in January 2024, and it just looks like the PCE inflation moved away a tad from the 2% inflation target. However, the longer term story is still solid. The February 2024 inflation is still a full 90 bps lower than September 2023. In, fact, if you look at the movement of PCE inflation since May 2023, it is sharply down 150 bps.

There are two positive for the PCE inflation reading. Firstly, even as the headline PCE inflation was up 10 bps at 2.5%, the PCE food inflation tapered by 10 bps from 1.4% in January 2024 to 1.3% in February 2024. Similarly, the core inflation (excluding food and energy) also tapered from 2.9% to 2.8%. The actual pressure came from energy inflation, despite still remaining in the negative on a yoy basis. energy inflation hardened from -4.9% to -2.3% between January 2024 and February 2024. In fact, core PCE inflation has fallen 60 bps over the last 4 months and a full 140 bps over the last 7 months. This is likely to make the Fed do a rethink on rate cuts. As Christopher Waller reiterated in a recent speech, “When the going is good, what is the hurry to cut rates.”

HEADLINE PCE INFLATION RISES TO 2.5%; 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 June 2023 and February 2024; the headline PCE inflation fell 70 bps from 3.2% to 2.5%, while core PCE inflation fell by 150 bps from 4.3% to 2.8%.

Month	Headline PCE Inflation	Core PCE Inflation
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	2.7%	3.2%
December 2023	2.6%	2.9%
January 2024	2.4%	2.9%
February 2024	2.5%	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 and hence it is normally tougher to handle and also tends to be stickier from a policy response perspective. On the other hand, food and energy tend to be more cyclical, and they are also amenable to policy response. One major reason for the tapering of the core inflation over the last 1 year is due to the supply chain constraints gradually getting addressed.

WHAT TRIGGERED THE 10 BPS BOUNCE IN PCE INFLATION

At a more macro level, one can argue that 10 bps shift is not something to really worry about. However, it does take the inflation 10 bps away from the sustainable target of 2%. That could have policy implications. There are two ways to look at the drivers of PCE inflation for February 2024. If you look at the basket mix, then food and core inflation are lower compared to January 2024, so the entire pressure has come only from energy inflation. That is not surprising considering that crude oil prices have surged sharply in recent weeks and are closing in on $90/bbl.

The other way to look at the shift in PCE inflation is through a break-up of good and services. Between January and February 2024, services PCE inflation actually tapered from 3.9% to 3.8%. However, during the same period, the goods inflation hardened from -0.5% to -0.2%. This was triggered by a hardening of inflation in durable goods as well as non-durable goods in this period.

The situation is clearer when you look at the MOM inflation shift between January and February 2024. The MOM inflation is lower at 0.3% in February 2024 compared to 0.4% in January 2024. There was a contrast with the goods inflation hardening from -0.2% to 0.5%, while the services inflation actually tapered from 0.6% to 0.3%. Clearly, the short term pressure on goods inflation is coming from the lag effect of higher crude oil prices. PCE inflation matters more to the Fed, as that is barometer for all rate related decisions.

PERSONAL INCOME STORY FOR FEBRUARY 2024?

PCE inflation is relevant in 2 ways. Firstly, it is announced towards the end of the month, so it covers more data points compared to consumer inflation. Secondly, PCE inflation reflects  prices from a personal consumption expenditure (PCE) perspective, so the Fed prefers PCE inflation as the benchmark for deciding on rate action. Here are some key data points.

• Personal income in February 2024 increased by $66.5 Billion (0.3% monthly) as per the estimates put out by the BEA.
• Disposable personal income (DPI), personal income minus personal taxes, increased $50.3 Billion (0.2%) while personal consumption expenditures (PCE) increased by $145.5 Billion (0.8%). The spike in personal consumption spending may actually dissuade the Fed from contemplating any rate cuts for now.
• The increase in current-dollar personal income in February 2024 primarily reflected increases in compensation and personal current transfer receipts, which were partly offset by a decrease in personal income receipts on assets.
• Let us turn to the positive drivers of $145.5 Billion increase in personal consumption expenditure for February 2024. There was an increase of $111.8 Billion in spending for services and an increase of $33.7 Billion spending for goods.
• Within services, the largest contributors to the spike were financial services, insurance, transportation services, and housing & utilities. Within goods, the leading contributor to the increase were motor vehicles & parts (light trucks), while others were stable.
• Personal saving was higher at $745.7 Billion in February 2024 and the ratio of personal savings to disposable personal income fell by 20 bps to 3.6%.

BREAK-UP OF US PCE INFLATION FOR FEBRUARY 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)	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24
Headline PCE Inflation (Year on Year)	3.3	3.3	3.4	2.9	2.7	2.6	2.4	2.5
Goods	-0.2	0.7	0.9	0.2	-0.1	0.2	-0.5	-0.2
Durable goods	-1.0	-1.9	-2.3	-2.2	-2.1	-2.3	-2.4	-2.0
Nondurable goods	0.2	2.1	2.7	1.6	1.0	1.6	0.5	0.8
Services	5.1	4.7	4.6	4.3	4.1	3.9	3.9	3.8
Addenda:
Core PCE excluding food and energy	4.2	3.7	3.6	3.4	3.2	2.9	2.9	2.8
Food	3.7	3.1	2.7	2.4	1.7	1.4	1.4	1.3
Energy goods and services	-13.0	-3.5	0.1	-4.6	-5.0	-1.7	-4.9	-2.3

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 190 bps till February 2024. Since September 2023, headline PCE is down 90 bps.
• PCE inflation for goods hardened from -0.5% to 0.2%, but it is the break-up of the goods inflation that is more interesting.
• Within goods, the durable goods saw hardening of inflation from -2.4% to -2.0% while the inflation in non-durable goods also hardened from 0.5% to 0.8%. The hardening has been very pronounced in the last 2 months.
• For February 2024, the services inflation tapered by 10 bps to 3.8%. Incidentally, the services inflation is down a full 180 bps from a high of 5.6% in April 2023.
• Core PCE inflation yoy has shown a consistent downtrend since June 2023; falling 180 bps from 4.3% to 2.5% in Feb-24 as supply chain conditions have eased globally.
• On a yoy basis, PCE food inflation is 10 bps lower at 1.3%, but is sharply down by 340 basis points from a level of 4.7% in June 2023.
• Energy inflation hardened sharply in February from -4.9% to -2.3% as the prices of gasoline and fuel increased sharply in line with the rising Brent Crude prices. Energy was the major driver of the 10 bps rise in PCE inflation for February 2024.

With the Red Sea crisis on and no signs of a rapprochement between the Hamas and Israel, it looks like energy inflation will be the story to watch out for.

BREAK-UP OF US PCE INFLATION FOR FEBRUARY 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)	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24
Headline PCE Inflation (Month on Month)	0.1	0.4	0.4	0.0	0.0	0.1	0.4	0.3
Goods	-0.3	0.8	0.2	-0.3	-0.6	-0.2	-0.2	0.5
Durable goods	-0.7	-0.3	-0.1	-0.2	-0.5	-0.5	0.2	0.2
Nondurable goods	0.0	1.4	0.3	-0.3	-0.6	-0.1	-0.4	0.7
Services	0.3	0.1	0.5	0.2	0.3	0.3	0.6	0.3
Addenda:
Core PCE excluding food and energy	0.1	0.1	0.3	0.1	0.1	0.2	0.5	0.3
Food	0.2	0.3	0.3	0.2	-0.1	0.0	0.5	0.1
Energy goods and services	0.1	6.1	1.7	-2.5	-1.9	-0.3	-1.4	2.3

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 0.0% in October and November. In February 2024, it is 10 bps lower at 0.3%.
• PCE inflation for goods bounced back sharply from -0.2% to 0.5% MOM for February 2024. Goods inflation for durables has been flat at 0.2%, while non-durables inflation hardened very sharply from -0.4% to 0.7%.
• Services inflation MOM is sharply lower from 0.6% in January 2024 to 0.3% in February 2024; indicating that pressure is coming from goods now, and not from services.
• Core PCE inflation, on a high frequency MOM basis, is sharply lower at 0.3% in February 2024, compared to 0.5% in January 2024; showing signs of supply chains easing.
• While the food inflation on MOM basis has fallen sharply from 0.5% to 0.1%, the energy inflation hardened very sharply from -1.4% to 2.3% in February 2024.

Broadly, there are some common themes emerging from the YOY and MOM indicators. Services inflation is peaking out and the gains of low food input prices is normalizing for goods. More importantly, higher crude oil prices is the big swing factor for US PCE inflation.

HOW WILL FED AND RBI REACT TO FEBRUARY 2024 PCE INFLATION

We now have the PCE inflation for February 2024 and the final GDP growth estimate for Q4 GDP growth coming in higher at 3.4%. That creates a situation wherein growth continues to be robust and that is driving higher consumption and keeping inflation at an elevated level. That is the message from US consumer inflation and from US PCE inflation. As Chris Waller has repeatedly said, “The Fed has to be very careful on cutting rates.” Despite the positive notes from Jerome Powell, the FOMC is likely to bide its time.

Even as the Fed is not in a tearing hurry to cut rates, what does this mean for the RBI. Even the RBI is unlikely to consider rate cuts till July 2024, when the elections are completed, a new government is in place and the full budget has been passed. For now, the Fed looks ambivalent and that is good for the RBI as it does not have to bite the bullet for now. The good news is that GDP has come in the US at robust levels so we may be looking at a new normal wherein the GDP growth may stay robust, despite higher inflation. That is the message we get from the US; and that is not bad at all for India.