The February headline PCE inflation figure rose .2% m/o/m and .1% core, about as expected. The headline rate is up 1.6% y/o/y vs 1.4% in January. The core rate is up by 1.4% vs 1.5% last month. As I hear the inflation deniers in my ear, I’ll say three things here, if what General Mills said this week is any indication that they will now start “taking price” in response to their own increasing raw material and logistics costs, February inflation data is old news. Most of the intense price pressures we’ve seen, and yes they are intense, has been mostly on the wholesale side, but for now because prices received data for March all jumped. Also, easy comps will of course lift the data in coming months but we know that already. Lastly, as the classic inflation definition is too much money chasing too few goods, assume all the government transfer payments handed out over the past 3 months and those to come is too much money and the supply constraints we’re seeing most everywhere on the goods side equals too few goods. And service companies are licking their lips to fully reopen and take price if they can.
Food prices rose by 3.3% y/o/y and energy by 1.2% (finally turning positive). Goods prices rose .8% y/o/y vs .4% in January, -.2% in December and -.4% in November. Notice the trend even before the easy comps kick in and we know why. The last time we saw at least an +.8% print was October 2018. Benign still but a change in trend and one that is about to accelerate in the data. Services prices rose 1.9% y/o/y for the 3rd straight month. As stated here many times, PCE overstates Medicare and Medicaid reimbursement rates which is price fixed at artificially low levels and understates housing and certainly doesn’t capture 10% annual home price gains.
The TIPS market is ignoring the benign data because they know its old news and the end of low readings. The 5 yr inflation breakeven is higher by 3.3 bps to 2.62%, a few bps below the 13 yr high. The 10 yr is up by 2.3 bps to 2.34%, a new 8 yr high.
10 yr INFLATON BREAKEVEN
After a 10.1% jump in January following the December passage of $600 checks, the February m/o/m income figure was down 7.1% as expected. This of course will spike higher in March and April as more checks get sent out. Spending fell 1% m/o/m, close to the forecast of down .8% but January was revised up by 100 bps to 3.4% right after the $600. Taking the two together has the savings rate at 13.6%, back to its December level after the 19.8% post $900b spending bill level. Keep in mind, these very high savings rates are not real in that they are not only capturing income generated by one’s job and the spending they then conduct. Income we know is being juiced by the government.