The crisis du jour – the potential debt ceiling default – has pushed inflation out of the top billing in the press. But the Fed is watching inflation as closely as ever. The Fed’s preferred measure is the PCE (Personal Consumption Expenditures) index rather than the CPI index.
The PCE price index increased 0.4 percent. Excluding food and energy, the PCE price index increased 0.4 percent. Real DPI increased less than 0.1 percent in April and Real PCE increased 0.5 percent; goods increased 0.8 percent and services increased 0.3 percent.
The PCE, excluding food and energy, is the measure most closely watched by the Federal Reserve. It simply hasn’t moved at all since December 2022. It’s well above the Fed’s target rate of 2%.
The Fed won’t cut the fed funds rate until inflation has stuck at their target for an extended period of time. Fed Chair Powell has reiterated this several times.
The Fed may not raise rates from this level but they probably won’t cut them any time in 2023 as the markets expect. There simply isn’t enough time in the year for inflation to subside and also the Fed to hold for an extended period.
The markets have been too optimistic for the past year. They don’t like being wrong.
That will only happen when the US and Mexico become the global manufacturing hub with economies of scale. Looking to mid 2024 with a bull market beginning.
Thank you for sharing the Truflation link. I have added it to the Control Panel. Unfortunately, the explanation of who is running it and their exact methods are weak.
I can see how this data could be useful as a background of how inflation is trending in the economy.
Of course, the Federal Reserve will take no note of Truflation. Fed policies, which move the markets, are based on the PCE index and the CPI. Adjustments to yields of TIPS and I-Bonds are based on the CPI.
Wendy
I agree, Truflation looks interesting. However, when I tried to understand the methodology and look under the hood I couldn’'t get very far other than vague statements about using novel data sources and more data and more real-time data.
Rather weak. Truflation assumes that because rents went down yesterday, that suddenly everyone who rents has lower rent cost. CPI assumes that because rent went down yesterday, on average, rents will go down over the next 14.73 months … because rental contracts are over 1 year on average. The main effect of that is that it dampens the effect of changing rent (similarly for car prices since not everyone buys their car at the same time). I bet truflation showed higher than 10% inflation about a year ago when rents (and used car prices) were still rising rapidly month to month, meanwhile CPI never got that high due to the above dampening effect.
