US PCE inflation for September 2024 at 2.1%; just shy of target

4 Nov 2024 , 12:14 PM

US PCE INFLATION TAPERS TO 2.1% FOR SEP-24

The much-awaited PCE inflation for September 2024 came in on the last day of October; and as expected, it came in lower at 2.1%. Remember, the August 2024 PCE inflation estimate was revised up from 2.2% to 2.3%. That effectively means; in the last two months between July 2024 and September 2024, the PCE inflation has tapered from 2.5% to 2.3% and further to 2.1% in September 2024. In the last 9 months, the headline PCE inflation has averaged 2.5%, the food PCE inflation has averaged 1.3%, the PCE Energy Inflation has averaged -1.0%; while the PCE core inflation has sustained a relatively higher average of 2.8%. Clearly, it is the pressure from core inflation that is preventing the headline PCE inflation from dipping below the 2% mark.

It is now a month and half since the Fed announced the crucial September Fed policy statement that cut rates by 50 bps. The next Fed policy is coming up on November 07, 2024 and it remains to be seen if the Fed will hike rates by 25 bps in November or possibly wait till December. The data on inflation has been supportive of rate cuts while there are no real concerns either over the GDP data or the jobs data. That should give some comfort to the Fed, especially since it has already embarked on an aggressive rate cutting exercise. It may also be an incentive for the Fed to sustain its dovish stance for now, although the eventual quantum of rate cuts would depend largely on the data flows over the coming months.

On the break-up of the inflation basket, the food inflation is in check and energy is driving the inflation basket lower. However, the core inflation basket continues to show pressure, averaging 2.8% in the last 9 months. The good news is that the average headline PCE inflation has been around 2.5%, which is a sign that it is showing signs of stability.

RATE CUTS MAY CONTINUE, ALBEIT IN CALIBRATED MANNER

When the unemployment rate for July 2024 spiked to 4.3%, it was the first trigger for the rate cut. At that point, the unemployment rate had spiked and the first quarter GDP growth had fallen to 1.6%. Since then, a lot has changed. The unemployment has mellowed down to 4.1% and the GDP growth in the second quarter bounced back to 3.0%. The first advance estimate of Q3 GDP also indicates that growth at 2.8% continue to be robust. With growth concerns abating and core inflation still an issue, the Fed is most likely to moderate its outlook for rate cuts in the next one year. That is evident in the CME Fedwatch probabilities. Initially, the expectation was that Fed would cut rates by 225-250 basis points by the end of 2025. Now, that has  moderated to rate cuts of 175-200 basis points by end of 2025.

FOOD, ENERGY PRICES EASE; CORE INFLATION THE ISSUE

We has spoken about the average food inflation, energy inflation and core inflation over the last 9 months. The table below captures the month-wise data for headline inflation and PCE core inflation on a monthly basis. Here are some key takeaways from the PCE inflation data over the last 9 months.

Month	Headline PCE Inflation	Core PCE Inflation
January 2024	2.4%	2.9%
February 2024	2.6%	2.9%
March 2024	2.8%	3.0%
April 2024	2.7%	2.9%
May 2024	2.6%	2.7%
June 2024	2.4%	2.6%
July 2024	2.5%	2.7%
August 2024	2.3%	2.7%
September 2024	2.1%	2.7%

Data Source: US Bureau of Economic Analysis (US)

If you look at the data on PCE inflation and core PCE inflation over the last 9 months; both have trended lower; although the core PCE inflation remains higher at an absolute level. The trend in recent months has been that, while food inflation has been flat and core inflation has edged up; it is easing energy inflation that has come as the real saviour. For the macro picture; between January 2024 and September 2024; the headline PCE inflation has eased by 30 bps while the core PCE inflation eased by just 20 bps. More importantly, the Core PCE inflation has been around 2.7% consistently for the last 5 months in a row. Overall, the good news is that the headline PCE inflation at 2.1% is getting  tantalizing close to the Fed target.

PERSONAL INCOME NARRATIVE FOR SEPTEMBER 2024?

Have you ever wondered how PCE inflation declared at the end of the month is different from the consumer inflation published in the middle of each month? Unlike consumer inflation, the PCE inflation captures more data points as it comes nearly 2 weeks after the consumer inflation. Secondly, PCE inflation reflects  prices from a personal consumption expenditure (PCE) perspective and is not just a barometer of prices, but also a barometer of consumer spending. That is why the US Fed relies more on PCE inflation for rate action, although the consumer inflation does act as the lead indicator. Here are key data points for the month of September 2024.

• Personal income in September 2024 increased by $71.6 Billion (0.3% monthly) as per the estimates put out by the US Bureau of Economic Analysis (BEA).
• Disposable personal income (DPI); which is personal income minus personal taxes, increased $57.4 Billion (0.3%) while personal consumption expenditures (PCE) increased by $105.8 Billion (0.5%). Compared to last month, all the above figures are sharply higher, which indicates higher levels of consumer spending happening.
• The increase in current-dollar personal income in September 2024 primarily reflected increases in compensation and personal current transfer receipts, which was partially offset by a decrease in personal income receipts on assets and proprietor’s income.
• Let us turn to the positive drivers of $105.8 Billion increase in current dollar personal consumption expenditure (PCE) for September 2024. There was an increase of $72.1 Billion in spending for services and an increase of 33.7 Billion om spending for goods. The latter has turned around from a decrease to increase in the current month.
• Within services, the largest contributors to the spike were healthcare, housing, and utilities. Within goods, the leading contributor to the increase was the spending for other non-durable goods (let by prescription drugs), food & beverages, as well as motor vehicles and auto components. These were offset by a fall in gasoline and energy goods.
• Personal savings were sharply higher at $1.00 Trillion in September 2024 and the ratio of personal savings to disposable personal income was lower by 20 basis points to 4.6%.

The broad message is that the fall in inflation may have been led by energy basket, but there is a visible and distinct revival in personal consumption spending in September 2024.

BREAK-UP OF US PCE INFLATION (YOY) FOR SEPTEMBER 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)	Feb-24	Mar-24	Apr-24	May-24	Jun-24	Jul-24	Aug-24	Sep-24
Headline PCE Inflation (Year on Year)	2.6	2.8	2.7	2.6	2.4	2.5	2.3	2.1
Goods	-0.3	0.0	0.0	-0.3	-0.4	-0.2	-0.9	-1.2
Durable goods	-2.1	-1.9	-2.2	-3.0	-2.7	-2.4	-2.2	-1.9
Nondurable goods	0.7	1.1	1.2	1.2	0.9	1.0	-0.2	-0.8
Services	4.0	4.2	4.0	3.9	3.8	3.7	3.8	3.7
Addenda:
Core PCE excluding food and energy	2.9	3.0	2.9	2.7	2.6	2.7	2.7	2.7
Food	1.4	1.5	1.3	1.2	1.3	1.2	1.1	1.2
Energy goods and services	-2.2	1.7	1.9	3.0	0.3	0.4	-5.0	-8.1

Data Source: US Bureau of Economic Analysis (BEA)

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

• Headline PCE inflation has shown a secular downward trend since April 2023. Between February 2024 and September 2024, the PCE inflation has fallen 50 bps to 2.1%.
• PCE inflation for goods in September 2024 was lower at -1.2% compared to -0.9% in August 2024. Within goods, the durable goods showed further improvement from -2.2% to -1.9% while the inflation in non-durable goods dipped sharply by 60 bps from -0.2% to -0.8%. It is down 180 bps in the last 2 months.
• For September 2024, the services inflation was at 3.7%; 10 bps lower than the previous month. In the last 9 months, services inflation has tapered from 4.2% to 3.7% and from a high of 5.6% in April 2023. However, in absolute terms, services inflation is a sticky story.
• Core PCE inflation has shown a consistent downtrend from June 2023 till February 2024; falling 150 bps from 4.3% to 2.8%. In the last 5 months, the PCE inflation has been consistently steady around the 2.7% mark.
• On a yoy basis, September 2024 PCE food inflation has risen by 10 bps to 1.2%; and appears to have largely stabilized. Taking a longer perspective, PCE food inflation is sharply down by 350 basis points from 4.7% in June 2023.
• Energy inflation is the real factor driving PCE inflation lower. Between January 2024 and May 2024, the PCE energy inflation has spiked from -4.9% to +3.0% (a spike of 790 bps). However, since then PCE energy inflation has tanked to -8.1% in September 2024.

To summarize, the future trajectory of PCE inflation would predicate on energy inflation dynamics; although it is necessary that core inflation is kept in structural check.

BREAK-UP OF US PCE INFLATION (MOM) FOR SEPTEMBER 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)	Feb-24	Mar-24	Apr-24	May-24	Jun-24	Jul-24	Aug-24	Sep-24
Headline PCE Inflation (MOM)	0.3	0.3	0.3	0.0	0.1	0.2	0.1	0.2
Goods	0.5	0.1	0.2	-0.4	-0.2	0.0	-0.2	-0.1
Durable goods	0.1	0.1	-0.2	-0.8	0.0	-0.3	-0.2	0.3
Nondurable goods	0.6	0.2	0.5	-0.1	-0.3	0.1	-0.1	-0.4
Services	0.2	0.4	0.3	0.2	0.3	0.3	0.2	0.3
Addenda:
Core PCE ex-(food and energy)	0.2	0.3	0.3	0.1	0.2	0.2	0.2	0.3
Food	0.1	0.0	-0.2	0.1	0.1	0.2	0.1	0.4
Energy goods and services	2.3	1.1	1.2	-2.1	-2.1	0.0	-0.8	-2.0

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 key takeaways.

• After being elevated in the range of 0.3% to 0.4% in the first 4 months of 2024; the MOM inflation fell back to 0.0%. In September 2024, the MOM PCE headline inflation has bounced by 10 bps to 0.2%.
• MOM PCE inflation for goods had dipped sharply from 0.0% to -0.2% in August 2024, but recovered to -0.1% in September. While durable goods inflation stood at 0.3%, non-durables inflation fell 30 bps from -0.1% to -0.4%. Services inflation MOM in September 2024 bounced by 10 bps to 0.3%.
• High frequency Core PCE inflation in September 2024 was up 10 bps at 0.3%, while the food inflation (MOM) also spiked from 0.1% to 0.4%. Again, energy is suppressing MOM inflation, dipping further from -0.8% to -2.0%.

Apart from the sober MOM inflation, Fed will take solace from the fact that PCE inflation has been in a range in calendar year 2024; which gives it the much needed assurance.

ROAD AHEAD DOVISH, BUT CUTS WOULD BE CALIBRATED

Here is a look at the updated CME Fedwatch probabilities after PCE inflation for September 2024 was announced.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450	450-475	475-500
Nov-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	94.5%	5.5%
Dec-24	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	72.1%	26.6%	1.3%
Jan-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	41.6%	45.8%	12.0%	0.5%
Mar-25	Nil	Nil	Nil	Nil	Nil	Nil	27.5%	44.4%	23.5%	4.4%	0.2%
May-25	Nil	Nil	Nil	Nil	Nil	13.9%	36.0%	33.8%	13.9%	2.3%	0.1%
Jun-25	Nil	Nil	Nil	Nil	6.8%	24.7%	35.0%	24.1%	8.2%	1.2%	Nil
Jul-25	Nil	Nil	Nil	1.6%	11.0%	27.1%	32.4%	20.3%	6.6%	0.9%	Nil
Sep-25	Nil	Nil	0.5%	4.2%	15.5%	28.6%	29.0%	16.5%	5.0%	0.7%	Nil
Oct-25	Nil	0.1%	1.0%	5.9%	17.5%	28.6%	27.1%	14.8%	4.3%	0.6%	Nil
Dec-25	Nil	0.1%	1.4%	6.8%	18.3%	28.5%	26.2%	14.0%	4.1%	0.5%	Nil

(Data source: CME Fedwatch)

Here is a quick dekko at how the rate cut probabilities panned out after the PCE inflation data for September 2024. There are doubts about the extent of dovishness. Here is our reading of the CME Fedwatch chart.

• With the September rate cut of 50 bps done for now, the focus shifts to November and December FOMC meets. The CME Fedwatch has assigned a probability of 94.5% to 25 bps rate cut in November 2024; with anything beyond that not on the radar. There is a 5.5% probability of status quo.
• What about the first milestone of December 2024? There is 72.1% probability of additional 50 bps rate cut (100 bps in all). Also, there is a probability of 26.6% for an overall 75 bps rate cut only. The modified view is that while 100 bps rate cut by December may be par for the course, 75 bps should also be an acceptable scenarios.
• Let us turn to June 2025 milestone. The CME Fedwatch is assigning a 90.6% probability for a 125 bps rate cut by June 2024; a 66.5% probability for overall 150 bps rate cuts from the peak. The probability of a 175 bps rate cuts has reduced to just 31.5%.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 81.4% probability for 150 bps of rate cuts from the peak and a high probability of 55.2% for 175 bps of rate cuts by December 2025. So, it looks very likely that the US Fed rate could settle at (3.50%-3.75%) by close of December 2025. The probability of 200 bps rate cut by December 2025 is now down to just 26.6%.

Is the Fed likely to tone down its aggressive rate cut timetable? That appears to be the road ahead. In a sense, the Fed view and the CME Fedwatch view are now largely in sync. Also, if you go by the speeches of Michelle Bowman and Neil Kashkari; the Fed would be open to a more calibrated and gradual reduction in rates. The most likely quantum of rate cuts (from the peak) is to the tune of 75 bps by end of 2024 and 175 bps by end of 2025. That should be dovish without being extravagant!