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US PCE inflation rises again

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US PCE inflation rises again

US inflation continues to surprise on the upside. The rise is longer-lasting and stronger than originally expected. Furthermore, the behaviour of median inflation suggests that it is broadening and is no longer merely affecting a small number of prices.* In this Macro Flash Note, Stefan Gerlach examines the latest US inflation data.

Stefan Gerlach
Stefan Gerlach

Headline PCE inflation increased from 4.2% in August to 4.4% in September (y/y). This marks a continuation of the trend of rising headline inflation. The driving factor was energy prices, which rose by 24.9%. Food prices increased 4.1%. Goods prices rose 6.1% and services 3.5%.

Core PCE inflation, by contrast, remained at 3.6% and has essentially stayed flat since May, when it reached 3.5%.

Median PCE inflation rose sharply from 2.4% in August to 2.7% in September. This is the largest monthly increase since these data were first computed in 1978 and potentially a worrisome development. Median inflation reached a low of 2.0% in January of this year and has since been rising gradually.

Interestingly, the monthly inflation rates for headline and core CPI are continuing to decline gradually. If core CPI steadily rises by 0.2% per month that is equivalent to an annual inflation rate of around 2.5%. In the context of the Fed tolerating inflation above target for a while, that might be acceptable.

However, monthly inflation for the median CPI appears to be rising. One interpretation is that the sustained increases in energy and other costs are gradually filtering into price increase for goods and services more broadly. Once energy prices stop rising, median inflation will only gradually decline towards the Fed’s 2% target. Thus, median inflation may serve as a mechanism that prolongs the temporary rise in inflation.

It should also be noted that the Fed’s adoption of average inflation targeting may also impact its interpretation of recent inflation rates. The Figure below shows the PCE index together with the path prices would have followed if inflation had been constant at an annual rate of 2% since September 2008 when Lehman Brothers collapsed. While prices were 8.0% below that path in January 2021, in September they are still 5.6% too low. This suggests that the Fed may be less concerned by the rise in inflation than some market participants believe.

Figure 1. PCE price index

Source: FRED, EFG calculations as at 01 November 2021

Overall, the recent behaviour of PCE inflation supports the Federal Open Market Committee’s widely anticipated decision to start tapering bond purchases at its next meeting on Tuesday and Wednesday this week, (November 2-3). However, it is unlikely to be worried about being “behind the curve.”

Figure 2. Annual inflation


Figure 3. Monthly inflation


Figure 4. Headline inflation


Figure 5. Core inflation


Figure 6. Median inflation

Source: FRED, EFG calculations as at 01 November 2021

* To compute the median inflation rate, compute the inflation rate for all subcomponents of the price index, order them from low to high and take the middle one (or the average of the two middle ones if there is an even number of components).