The Boock Report

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Inflation, income and spending

The August headline PCE inflation figure was up .3% m/o/m, 2 tenths more than expected and after a one tenth drop in July. The core rate was up by .6% m/o/m, one tenth more than expected but July was revised down by one tenth to flat so call it a push at the core level. Versus last year, core PCE was up by 4.9% after a 4.7% rise in July. Energy prices fell by 5.5 m/o/m while food prices rose another .8%.

Bottom line, while we know the Fed prefers the PCE over the CPI, after having seen the August CPI 3 weeks ago, it does take the sting out of the PCE when it finally comes out, even if slightly different than the estimate. The problem right now with the government inflation stats is the housing component. It’s 30% of headline CPI (40% of core) and about half that for PCE. The BLS is still capturing an increase in rents and will so for the next quarter or two but in reality we know rental growth increases are slowing, albeit off high levels. So because the Fed is paying more attention to the BLS numbers instead of other private sector surveys, they are driving policy on one side of the road while the economy has already turned down the other.

With respect to the Fed, we’ve heard multiple times now their desire to get to a positive real interest rate. Their benchmark is this core PCE and the question is where do their interest rate hikes eventually meet up with a moderation in this figure, assuming they get there. By getting the fed funds rate to 4%ish by yr end, and compare this to their yr end core PCE estimate of 3.7% and voila, a positive real interest rate in their eyes.

With respect to income and spending for August, when including the July revision, they were both about as expected so I don’t expect much change in Q3 GDP estimates. The savings rate was 3.5% for a 2nd month but that is the 2nd lowest level since 2008.

Core PCE y/o/y

Savings Rate