US Inflation at 40 Year Highs with Fed Reserve Key Measure Core PCE Rising 0.6% in June

Federal Reserve Governor Chairman Powell reminded us at this week’s FOMC that the Fed’s key influence or measure for inflation is the core PCE index, which excludes volatile food and energy prices, Core PCE index increased 4.8% in June from a year ago, up from 4.7% in May. Rising energy prices continue to be a key factor driving inflation and global oil prices remain elevated. On a monthly basis, core prices rose a seasonally adjusted 0.6% in June from a month earlier, a sharp rise from the 0.3% increase in each of the prior four months.

The PCE price index is closely watched since it is the preferred inflation measure of the Federal Reserve, which has begun raising interest rates for the first time since the pandemic began to tamp down rising prices. The Fed has traditionally tended to focus on the PCE price index because it gives a more complete picture of consumer prices, while the public and many investors tend to be more aware of the Labor Department’s CPI figure.

The market seems to go through phases of trading on the premise that the US is at or close to, peak inflation. The shock will come if better inflation news in coming months is not coming.


PCE Index June 2022

  • PCE Price Index was up YoY 6.8% vs same month last year of 6.3
  • The highest reading since January 1982
  • Energy prices surged 43.5% from a year earlier,
  • Food prices gained 11.2% y/y
  • Prices for durable goods decelerated for the fifth straight month, rising 6.1% from a year ago, a signal that supply-chain pressures that have driven inflation over the past year and a half are easing.
  • PCE price index 1.0% vs 0.6% last month
  • The largest increase since September 2005.
  • Prices for goods were up 1.5% and services 0.6%.
  • Food prices surged 1% and energy 7.5%.

PCE Price Index

United States Personal Consumption Expenditure Price Index

Core PCE Index June 2022

  • Core PCE 4.8% vs. 4.7% expected
  • Core ex food and energy month-to-month 0.6% vs. 0.5% estimate. Last month 0.3
  • However, prices for services increased 4.9%, the sharpest gain since 1990.

Core-PCE Price Index

United States Core Personal Consumption Expenditure Price Index

Peak Inflation?

There are signs this month (July) price pressures in some key parts of the economy are cooling, suggesting that June’s high inflation readings may be the peak. Gasoline prices have fallen around 15% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 36% since mid-May and corn futures prices are down 21% from mid-June.

Gross domestic product declined at an annual rate of 0.9% in the second quarter, adjusted for inflation and seasonality. That followed a 1.6% rate of contraction in the first quarter. Consumer spending, which accounts for roughly two-thirds of total economic output, picked up at a 1% annual rate in the second quarter, down from 1.8% in the first quarter.

The University of Michigan consumer-sentiment survey showed that longer-term inflation expectations came in at 2.9% in July, down from June’s 3.1% but slightly above the average rate during the 20 years before the Covid-19 pandemic.

The consumer-price index usually runs somewhat hotter than the PCE index due to differences in how they are constructed.

The two measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is broader, including spending on behalf of households, for example, employer-sponsored healthcare plans, Medicare and Medicaid. The PCE price index as a result has a heavier weight for healthcare prices. Meanwhile, housing costs account for a much bigger share of the CPI than the PCE price index.

Personal savings rate as a percentage of disposable personal income

United States Personal Savings Rate

 Source: US Bureau of Economics

From The TradersCommunity News Desk