US Stagflation Risk with Real Personal Spending Flat While Core PCE Inflation Rates Too High

The core personal consumption expenditure price index (Core PCE prices) in the US, which exclude food and energy, rose by 0.2 percent month-over-month in November of 2022 as expected.  The annual rate, the Federal Reserve’s preferred gauge of inflation, fell to 4.7 percent from 4.7 percent, also with expectations.  The report reminded us of stagflation risk, real spending was flat while the inflation rates were still too high for the Fed’s liking. Federal Reserve Governor Chairman Powell reminded us at the FOMC that the Fed’s key influence or measure for inflation is the core PCE index.

Notably real personal spending, adjusted for changes in prices was flat after it rose 0.5% in October which had been the most since the start of the year and largely reflecting a surge in outlays for merchandise.

The PCE price index is closely watched since it is the preferred inflation measure of the Federal Reserve, which began 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.

Highlights

Core PCE Index November 2022

  • Core-PCE Price Index, which excludes food and energy, increased 0.2% (consensus 0.2%).
  • On a year-over-year basis, the core-PCE Price Index was up 4.7%, versus 5.0% in October.
United States Core PCE Price Index Annual Change
United States Core Personal Consumption Expenditure Price Index
United States Core Personal Consumption Expenditure Price Index

PCE Index November 2022

  • PCE Price Index was up 0.1% month-over-month (consensus 0.1%)
  • Deflator MoM +0.1% vs +0.3% prior
  • On a year-over-year basis, the PCE Price Index was up 5.5%, versus 6.0% in October. It is the lowest reading so far this year.
  • Prices for goods increased 6.0%
  • Prices for services rose 5.2%.
  • Food cost went up 11.2% and energy prices increased 13.6%.
United States PCE Price Index Annual Change
United States Personal Consumption Expenditure Price Index

US Personal Income and Spending

  • US Personal income increased 0.4% month-over-month (consensus 0.3%)
  • Personal spending increased 0.1%, as expected.
  • Real personal spending was up 2.0% year-over-year (versus up 1.9% in October). Real disposable personal income was up 0.3% month-over-month and down 2.5% year-over-year (versus down 3.0% in October).
  • Wages and salaries were up 0.5% month-over-month following a 0.5% increase in October.
  • Proprietors’ income was down 0.2% month-over-month following a 0.2% decline in October.
  • Rental income was down 0.1% month-over-month after declining 0.2% in October.
  • Personal current transfer receipts were up 0.2% month-over-month after increasing 1.6% in October.
  • The personal savings rate as a percentage of disposable income increased to 2.4% from 2.2% in October, which remains close to an all-time low.
United States Personal Income
US Personal spending

PCE Price Index

CPI v PCE Inflation?

The two inflation 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.

Source: US Bureau of Economics

From The TradersCommunity News Desk