PCE inflation jumps again

[WendyBG]

Two separate government agencies calculate inflation using their own methods. The Federal Reserve prefers the PCE (the Commerce Department’s personal-consumption expenditures price index) over the BLS’s CPI (Consumer Price Index).

https://www.wsj.com/articles/inflation-hits-fresh-four-decad…

**Inflation Hits Fresh Four-Decade High, According to Fed’s Preferred Measure**
**Consumer prices jumped in June, pushed up in part by high energy prices**
**By Gwynn Guilford, The Wall Street Journal, July 29, 2022**

**Inflation accelerated in June, measured by the Federal Reserve’s preferred gauge, driven by a jump in energy prices as well as broader-based increases.**

**Consumer prices rose 6.8% in June from a year earlier, up from 6.3% in May and April, as measured by the Commerce Department’s personal-consumption expenditures price index. The gain in June marked the sharpest rise since January 1982.**

**The so-called core PCE index, which excludes volatile food and energy prices, increased 4.8% in June from a year ago, up from 4.7% in May. On a monthly basis, core prices rose a seasonally adjusted 0.6% in June from a month earlier, a sharp pickup from the 0.3% increase in each of the prior four months....** [end quote]

The Fed’s increases in the fed funds rate will be very slow to change the inflation rate. It takes a long time for changes in the overnight interest rate charged to banks to work their way into daily spending by consumers.

M1, which is the liquid money supply that can be spent right away, suddenly stopped growing and actually had a slight drop. But consumer loans are still growing fast.

https://fred.stlouisfed.org/series/M1SL
https://fred.stlouisfed.org/series/CONSUMER

As long as the growth of demand is faster than the growth of supply (of goods and services), consumer prices will rise.

And the Fed will continue tightening to gradually reduce demand even if a recession results.

Wendy

[iampops5]

I am guessing that demand for goods made in China will exceed supply for as long as China keeps shutting down at the first hint of a COVID outbreak-which appears to me be likely for the foreseeable future.

I am guessing gas and food will be expensive for as long as Putin keeps up his long and protracted invasions in Ukraine and elsewhere-which also seems likely to me.

So I am betting on repeated inflation wildfires (like the late 1970’s) followed by repeated rate increases (like the late 1970’s).

I have no clever solution. Start collecting my SS and using it to buy additional equities in my taxable account (brk plus boring etfs) on the theory that I can grow our net worth and income commensurate with inflation in a risk adjusted way, and enjoy life while I still can.

[mostlylong]

The Fed’s increases in the fed funds rate will be very slow to change the inflation rate. It takes a long time for changes in the overnight interest rate charged to banks to work their way into daily spending by consumers.

Some longer lag times may be operating, but certainly not in general, especially for interest rate sensitive sectors like housing.

Mortgage rates, which immediately affect the financed cost of real estate purchases, responded quickly to the Fed policy changes, with 30-year fixed rates increasing a relative 70% (5.30/3.11), or an incremental 2.19% (5.30 - 3.11), since the beginning of the year. This means that a potential home buyer’s finance charges increased 70% over this period. By the end of April the 30-year rate was 5.10% and the second Fed funds rate increase was only shortly thereafter on May 5, up to 75bp.
30-Year Fixed Rate Mortgage Average in the United States
Dec 30 2021 3.11%
Jan 27 2021 3.55%
Feb 24 2021 3.89%
Mar 31 2021 4.67%
Apr 28 2021 5.10%
May 26 2021 5.10%
Jun 30 2021 5.70%
Jul 28 2021 5.30 %
(https://fred.stlouisfed.org/series/MORTGAGE30US)

Increases in financing costs should put downward pressure on demand for housing and hence home prices. Looking at the two-month period from April to June, new home prices declined 12% in just two months.
Median Sales Price for New Houses Sold in the United States
April 2022 $457,000
May 2022 $444,500
June 2022 $402,400
(https://fred.stlouisfed.org/series/MSPNHSUS).

Housing is a meaningful contributor to GDP. Further, as the dollar volume of housing-related transactions decline, associated segments will be affected (commodities, appliances, housing services like lawn care, pest control, etc). Residential fixed investment declined an estimated 14% annualized rate in Q2 and subtracted 0.71% from Q2 GDP growth when overall Q2 GDP growth was an estimated -0.9%.
(https://www.bea.gov/sites/default/files/2022-07/gdp2q22_adv…)

Increases in the Fed funds rate since mid-March may be having the intended effect on interest-rate sensitive segments of the economy as soon as Q2.