US PCE inflation for September 2023 stays flat at 3.4%

30 Oct 2023 , 09:18 AM

For the month of September 2023, the US Bureau of Economic Analysis (BEA) announced the PCE (personal consumption expenditure) inflation at 3.4%. It may be recollected that the July 2023 inflation, which had been originally announced at 3.3%, had been revised up to 3.4% with more data points coming in. However, the August PCE inflation has now been revised lower by 10 basis points to 3.4%. Now, with the September 2023 PCE inflation also coming in at 3.4%, the headline PCE inflation has been flat at 3.4% for three months in a row. The PCE inflation (based on personal consumption expenditure) is used by the Fed as the benchmark to decide on rate action. However, past experience has been that the PCE inflation has approximately followed the same trend as the consumer inflation. 

Every 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 put out towards the end of the month for the previous month. The US BEA has just announced the PCE inflation for September 2023 at 3.4%. Let us quickly look at the time series trend of PCE inflation and core PCE inflation (excluding food and energy).

PCE inflation for September 2023 flat at 3.4%

In fact, June 2023 was the month when the PCE inflation downtrend ended at 3% (later revised to 3.2%). 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. Like CPI inflation in the US, even the PCE inflation showed a rising trend since June 2023. The table captures PCE inflation (yoy) over last 7 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%

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 is the overall price hike across all the three categories. The core PCE inflation, on the other hand, captures the inflation excluding food and energy. Core inflation tends to be sticky and structural since, unlike food and energy inflation tend, core inflation is not cyclical. It is this structural nature of core inflation that makes it important from a policy perspective. Central banks worry more about core inflation as it is less amenable to policy based adjustments. Food and energy inflation are more about demand and supply factors and there are policy measures government can use to address them.

Core inflation came into the limelight in the aftermath of COVID as supply struggled to keep up with demand amidst supply chain disruptions. This had triggered an all-round spike in inflation, driven core inflation. However, there is good news on the core inflation front for the US economy. For example, while the headline inflation has bounced back in the last few months, the core PCE inflation has continued its downtrend since April 2023. During this period, the core PCE inflation has tapered from 4.8% to 3.7%. OF course, for the Fed, the target is 2% headline PCE inflation and 2% core PCE inflation with a first target of 3% for core PCE inflation. That is still quite far away.

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

The US Bureau of Economic Analysis (BEA) publishes the PCE inflation on a yoy basis and on a high frequency MOM basis. 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 components of this inflation shift.

Break-up of PCE Inflation (YOY)	Feb-23	Mar-23	Apr-23	May-23	Jun-23	Jul-23	Aug-23	Sep-23
Headline PCE Inflation (Year on Year)	5.2	4.4	4.4	4.0	3.2	3.4	3.4	3.4
Goods	3.6	2.0	2.2	1.2	-0.4	-0.2	0.7	0.9
Durable goods	0.3	0.4	0.5	0.4	-0.5	-1.0	-1.9	-2.3
Nondurable goods	5.5	2.8	3.1	1.6	-0.3	0.2	2.1	2.7
Services	6.0	5.7	5.6	5.4	5.1	5.3	4.9	4.7
Addenda:
Core PCE excluding food and energy	4.8	4.8	4.8	4.7	4.3	4.3	3.8	3.7
Food	9.5	7.9	6.9	5.9	4.7	3.7	3.1	2.7
Energy goods and services	4.3	-7.6	-5.7	-12.3	-17.5	-13.0	-3.6	0.0

Data Source: US Bureau of Economic Analysis (BEA)

The above table givers 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 of the major takeaways from the data.

• The headline PCE inflation showed a falling trend from February to June 2023. However, after the 20 bps bounce in July due to the oil price impact, the PCE inflation has been static at 3.4% for the last 3 months in succession.

   

• PCE inflation for goods has increased from 0.7% in August 2023 to 0.9% in September 2023. It has shown a bounce from negative goods PCE inflation about 2 months ago. 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 -2.3%, the lowest in the last 8 months. However, the inflation in non-durable goods stands at 2.7%. Both have seen trend sharpening over August 2023. Due to this dichotomy, the overall goods inflation of 0.9% may be misleading.

   

• September 2023 services inflation continues to be high at 4.7% (20 bps lower than August 2023). This is the lowest in the last 8 months, and during this period service inflation fell from a high of 6%. Financial services and consultancy are the drivers.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 4.8% to 3.7%. This is due to a combination of supply chain issues getting addressed as well demand tapering amidst slowdown concerns in the US economy.

   

• On a yoy basis, food inflation has also shown a consistent downtrend over last 8 months, so the entire pressure is coming from energy inflation. On a yoy basis, energy inflation has finally come to the zero levels, after consistently being in the negative.

To sum it up, on the yoy PCE inflation front, the pressure has come from non-durable goods, services and from energy prices. That is not surprising with crude around $90/bbl.

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

The high frequency month-on-month (MOM) inflation published by the US Bureau of Economic Analysis (BEA), apart from the yoy inflation, captures the short term trends better. It is also less vulnerable to the base effect as it focuses on high frequency data points.

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

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 a mix across food, fuel, and core inflation. Here are the key takeaways.

• The MOM PCE inflation had been on a rising trend since May 2023, and has touched a 7-month high of 0.4% in August and has stayed flat in September too. That indicates a lot of pressure exerted on PCE inflation from short term macro adjustments. 

   

• PCE inflation for goods has been positive at 0.2% MOM for September 2023; but sharply lower compared to 0.8% in August 2023. A more interesting trend emerges when the goods inflation of 0.2% is broken up.

   

• The goods inflation components actually show a contrasting trend. For example, inflation in durable goods is negative at -0.1%. However, the inflation in non-durable goods stands at 0.3%, which is a sharp fall from 1.4% in August. It is hard to miss this dichotomy within the goods basket; both on a YOY basis and on MOM basis.

   

• Services inflation MOM has spiked to 0.5% in September 2023, compared to 0.2% MOM; in August 2023. This is the highest level of MOM services inflation in last 8 months and clearly shows where the inflation pressure is coming from. Post COVID, inflation in the US economy has been largely triggered by the consumption of services. The trend gets pronounced as services dominate the US economy.

   

• Core PCE inflation yoy has shown a consistent downtrend over the last 8 months from 0.5% to 0.1% on a MOM basis, but spiked to 0.3% in September. This is due to supply chain issues resurfacing amidst the rising geopolitical risks.

   

• Interestingly, MOM food inflation is up in the last 2 months but the good news is that MOM energy inflation is down from6.1% in August to 1.7% in September 2023. That may indicate that the worst of oil pressures may be done in the short term.

In a nutshell, the high frequency MOM PCE inflation front also draws similar inferences like the YOY inflation. Energy inflation may be tapering, but inflation in services is the real challenge for the US economy.

How will the Fed interpret this data, and the key takeaways for India?

From the Fed perspective, this is ratification of its broadly hawkish stance, which the likes of Jerome Powell and Michelle Bowman have been consistently favouring. The recent trend shows that inflation may not spike, but even coming down will be tough. Fed was awaiting the PCE inflation data, and after the pause in September, a rate hike in November 2023 looks very possible, even though the CME Fedwatch has other ideas. Fed has to manage inflation and also, inflation expectations. The real challenge for the Fed comes not from the stable PCE data but the spurt in the GDP data for Q3 put out on Thursday. The first estimate of Q3GDP at 4.9% is sharply better than expected and full year GDP may be further upgraded. The flat PCE inflation and solid GDP growth and labour data would reassure the Fed that they can hike rates further without worrying overtly about a hard landing. 

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. Inflation may be rising in India, but strong US growth is reassuring about the global growth engine. Both the US and India are now away from their inflation targets, but unwilling to give up on growth. For the RBI, the Fed November 01, 2023 Monetary Policy statement will assume a lot of importance from a policy perspective.