US PCE inflation for November 2023 falls 30 bps to 2.6%

24 Dec 2023 , 10:18 AM

November 2023 PCE inflation falls sharply to 2.6%

For the month of November 2023, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation at 2.6%. That is a full 40 bps lower than originally estimate of 3.0% for October. The November 2023 inflation is also a full 80 points 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 by 180 bps from 4.4% to 2.6%. 

It is not just the headline PCE inflation, but even the core PCE inflation (excluding food and fuel) that has fallen sharply. In fact, core PCE inflation fell 40 bps over the last 2 months and a full 160- bps since April 2023. Normally, the PCE inflation is announced by the BEA in the last week of the month. However, this time around, the PCE inflation has been announced one week early due to the long Christmas holidays in the last week of December 2023.

Will low PCE inflation turn the RBI on dovish path?

If you read the December 2023 statement of the Federal Reserve, there is a clear shift from a hawkish stance to a dovish stance. The Fed has moved from guidance on rate hikes to giving guidance on rate cuts. It has guided for 3 rate cuts in 2024 and 4 rate cuts in 2025, guiding total cuts of at least 175 basis points in next two years. One trigger has been the low inflation in last few months and that trend only got accentuated in the November reading. 

PCE inflation at 2.6% means that the Fed target of long term inflation at 2% is just 60 bps away. The US Fed relies on PCE inflation more than the consumer inflation for its rate decisions. What about the RBI? If you read the minutes of the RBI MPC published on 22-Dec, RBI would like to wait longer to be convinced that price stability is back. RBI may not directly embark on a dovish path, although lower US PCE inflation should give comfort to the RBI.

PCE inflation for November 2023 at 2.6%; core PCE at 3.2%

The fall in PCE inflation has been progressive and it becomes apparent if you look at time series data. For instance, between April 2023 and November 2023; the headline PCE inflation fell from 4.4% to 2.6%. The table captures PCE inflation (yoy) over last 8 months, to give a time series perspective.

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%

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. 

What triggered the sharp fall in PCE inflation?

For the month of November, the yoy PCE inflation came in sharply lower at 2.6%. This is the first significant signal of the PCE inflation moving towards the eventual Fed target of 2%. Here is how the price break-up for the month looked like. For instance, the prices for services increased 4.1% percent and prices for goods decreased 0.3%. That has been a standard trend that we have witnessed in the last few months. 

Services inflation continued to stay well above average on yoy basis, while goods inflation has been low or negative due to the trend of falling commodity prices globally. Food prices increased 1.8% and energy prices decreased -6.0%, which is in sync with falling crude prices since the Russia-Ukraine war began. Also, if you look at core inflation (excluding food and energy), it came in sharply lower at 3.2% in November, compared to the year ago period. 

Let us take a quick look at the MOM (month-on-month) PCE inflation, which is also the high-frequency indicator of prices. November PCE MOM inflation came in negative at -0.1% over October, showing the short term tapering trend. However, even on an MOM basis, the prices for goods decreased -0.7%, while the prices for services increased 0.2%. The food price basket saw -0.1% fall on MOM basis, while the energy prices fell by -2.7%,but the core PCE MOM inflation was up 0.1%. Overall, short term trend is about lower PCE inflation.

How personal incomes panned out in November 2023?

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

• Personal income in November 2023 increased by $81.6 billion (0.4% monthly) as per the estimates put out by the BEA.

   

• Disposable personal income (DPI), personal income minus personal taxes, increased $71.9 billion (0.4%) while personal consumption expenditures (PCE) increased by $46.7 billion (0.2%). This is indicative of more purchasing power in the hands of consumers.

   

• The increase in current-dollar personal income in November 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 the $46.7 billion increase in personal consumption expenditure for November 2023. There was an increase of $58.8 billion in spending for services and a decrease of $12.1 billion in spending for goods. 

   

• Within services, the largest contributors to the spike were housing, utilities, food services and accommodations. Within goods, the leading contributor to the decrease was gasoline and other energy goods. That was net impact of $46.7 billion spike in PCE.

   

• Personal saving was $839.8 billion in November 2023 and the ratio of personal savings to disposable personal income stood at 4.1%.

Break-up of US PCE Inflation for November 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)	Apr-23	May-23	Jun-23	Jul-23	Aug-23	Sep-23	Oct-23	Nov-23
Headline PCE Inflation (Year on Year)	4.4	4.0	3.2	3.3	3.3	3.4	2.9	2.6
Goods	2.2	1.2	-0.4	-0.2	0.7	0.9	0.2	-0.3
Durable goods	0.5	0.4	-0.5	-1.0	-1.9	-2.3	-2.2	-2.1
Nondurable goods	3.1	1.6	-0.3	0.2	2.1	2.7	1.6	0.7
Services	5.6	5.4	5.1	5.1	4.7	4.6	4.3	4.1
Addenda:
Core PCE excluding food and energy	4.8	4.7	4.3	4.2	3.7	3.6	3.4	3.2
Food	6.9	5.9	4.7	3.7	3.1	2.7	2.4	1.8
Energy goods and services	-5.7	-12.3	-17.5	-13.0	-3.5	0.1	-4.7	-6.0

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 April, PCE inflation (yoy) has fallen 180 bps.

   

• PCE inflation for goods fell back to negative at -0.3%, but it is the break-up of the goods inflation that is more interesting. 

   

• Within goods, inflation in durable goods is -2.1% while the inflation in non-durable goods stands at 0.7%. 

   

• November 2023 services inflation tapered further to 4.1% from 4.3% in October. It has fallen from a high of 5.6% in April 2023.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 4.8% to 3.2% as supply chain conditions have sharply improved globally. 

   

• On a yoy basis, PCE food inflation at 1.8%, is lower than 2.4% in October, and is down from a high of 6.9% in April 2023. Oil inflation has been fairly volatile, albeit negative. 

To sum up, on the yoy PCE inflation front, inflation in non-durable goods and services is tapering. Above all, food, fuel, and core inflation are all inching lower.

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

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 0.00% in October. In November, it is marginally negative at -0.1%.

   

• PCE inflation for goods stayed negative at -0.7% MOM for November 2023, deeper than -0.3% in October 2023. Goods inflation for durables and non-durables were negative at -0.4% and -0.9% respectively. 

   

• Services inflation MOM had fallen sharply from 0.5% in September 2023 to 0.2% in October 2023 and that level has been maintained in November 2023 also. 

   

• Core PCE inflation MOM has fallen to 0.1% in November 2023, even as the core PCE inflation for October was revised lower from 0.2% to 0.%.

   

• Like the YOY inflation figures for food and energy, even the MOM food inflation came in negative for the month of November 2023. While energy MOM inflation has been in the negative for the last few months, food inflation is in negative after a gap of 5 months.

The high frequency MOM PCE inflation reading also draws similar inferences like the YOY inflation. There is all-round tapering of inflation across goods and services, with energy and food driving most of the fall in PCE inflation in November 2023.

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

The first message on the Fed approach came in the Fed December statement, which clearly shifted its focus to rate cuts from rate hikes. Fed has already promised up to 7 rate cuts by end of 2025. The sharp fall in PCE inflation means that the actual rate cuts could be more than seven in 2 years, or more rate cuts could be front-ended, or the rate cuts may be of greater intensity. While the hawks like Jerome Powell and Michelle Bowman continue to caution about higher inflation risks, the Fed action has veered towards a dovish approach. From “Higher for longer” the latest PCE inflation could officially mark a shift to rate cuts.

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. That stand has continued. The latest PCE inflation data for November from the US indicate that inflation is finally trending surely towards the 2% mark. That should only reassure the Fed about rate cuts in the coming FOMC meetings. For the RBI, that opens up the doors to think about rate cuts as the real rate of interest at 2% is uncomfortably high. The sharp fall in PCE inflation in November is a signal to the RBI that the time is ripe to consider a shift to a neutral stance.