Friday’s personal consumption expenditure data confirmed the January inflationary boom.
According to the Bureau of Economic Analysis, January’s personal consumption expenditure price index (PCE) rose by 0.6 percent compared to December. This is a significant acceleration from December’s 0.2 percent pace. It is important to note that the previous month’s figure was increased from 0.1 percentage points and that November’s index was raised from 0.1 percent and 0.2 percent respectively. This indicates that inflation was already much higher and prices are already higher than originally thought. Prices are increasing faster than expected from a higher base.
According to the data, Wall Street’s economists underestimate inflation. Econoday reported that consensus was for a gain of 0.4 percent. Econoday found that the notion of a soft landing — inflation falling without severe damage to the labor force or economic growth — was at most partially based on the assumption that inflation would continue its downward slide after last summer’s peak.
The January inflation numbers are sufficient to question the possibility of a soft landing scenario.
This is important because it does not contain just one data point. These PCE numbers confirm what we saw in the consumer price indicator (CPI), and producer price index(PPI).
According to the Labor Department data, the CPI increased 0.5 percent over the month prior, which is a significant increase in price rises from the 0.1 per cent recorded in December. The December figure was updated from the preliminary report that showed the CPI had fallen by 0.1 percent. The CPI has increased by 6.4 percent compared to a year ago. These inflation numbers exceeded all expectations and, along with PCE inflation, demonstrated that prices are already higher than expected and increasing faster than anticipated.
Producer price index rose 0.7 percent in December compared to December. Goods prices increased 1.2 percent, and services prices rose 0.4 percent. These figures were also higher than expected.
Inflation’s most important parts, energy and food, were in hot water in January. The PCE index measured that food prices rose by 0.4 percent. This is a significant decrease from the last year’s sky-high levels of food inflation (when it peaked at 1.4%) in February. However, this month is now at 0.4. Progress in reducing food inflation has stalled. It is also much higher than what could be considered historical normal.
Inflation rose two percent in January as energy prices rose for the first time since last summer.
While sophisticated people prefer to focus on core prices to assess underlying inflation pressures, it is worth paying attention to energy and food prices as they have a significant impact on inflation perceptions. The most common prices at grocery stores and gas stations are the most commonly encountered by consumers. They have a significant impact on people’s perception of whether their wages are keeping pace with living costs. Anybody concerned about a wage-price spiral must not ignore headline inflation and the food or energy components.
Inflation expectations for the year ahead rebounded in February’s University of Michigan consumer sentiment survey. This may be due to rising fuel and food prices. The average consumer now anticipates 4.1 percent inflation in the next year, compared to 3.9 percent in January.
The Core PCE prices (which exclude food and energy) rose 0.6% compared to the previous month. The forecast was for 0.4%. The December core index grew by 0.3 percent to 0.4%. This message is repeated: inflation is faster than expected and has been for a while faster than we thought.
Prices for core goods rose by 0.6 percent. Durables were up 0.3 percent and nondurables 0.8 percent. It is now premature to expect that core goods will now become disinflationary.
Core services also rose by 0.6 per cent. Jerome Powell, Federal Reserve Chair, has often mentioned that core services, which exclude housing, are a key metric for the central bank. This also rose 0.6 per cent.
The Cleveland Fed found that the median PCE inflation was 0.6 percent, which is in line with overall inflation. This indicates that inflation is not about isolated cases but the central tendency to prices. The January median inflation figure is not encouraging news. It is an indicator of how inflation is moving. This was the highest median inflation rate since August last year, at 0.6
The Fed Did It Wrong, and Turned Itself into a Corner
Data over the last two weeks makes the Fed’s decision not to reduce to a 25-basis points hike seem like a mistake. If Fed officials had known about the acceleration when they met three weeks ago they would have kept the course at 50 basis points to match the December hike.
March 21-22 is the Fed’s next meeting. They will then have one more jobs report, and another month of CPI and PPI. They won’t have another month of PCE price index which they claim to be closely following. If prices and jobs are very hot, it’s unlikely they will try to shock market expectations by raising 50basis points at their March meeting. The Fed has been accused of being incapable of reaccelerate rate increases by reducing rates to 25-basis points prematurely at its last meeting.