Mary Y. from Evanston, IL asks: Hi Mitch, I’ve been trying to wrap my head around the latest inflation numbers. Are they good or bad? Seems like prices are still going up, especially for gas. Thank you for your time.
Mitch’s Response:
Thanks for your question. Understandably, the latest inflation data could be a bit confusing. There are quite a few inflation gauges out there, from the consumer price index (CPI) to the personal consumption expenditures (PCE) price index to ‘core’ prices and many more. The Cleveland Federal Reserve tracks several, and has numerous ways of measuring inflation across the economy. It’s a lot to keep up with.1
Fortunately, I think most investors like yourself can just focus on one inflation gauge to help avoid confusion. And that’s the aforementioned personal consumption expenditures price index, or ‘PCE price index.’ This index is the Federal Reserve’s preferred inflation gauge, so it’s the one they consider most closely when setting interest rate policy. As such, it’s arguably the index investors should pay the most attention to as well.
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August data for the PCE price index just came out, and I would frame it as good news overall. The PCE price index rose 0.4% in August from July, which was largely driven by higher gas prices as you mentioned. I’ve written before about why gas prices have been going up, which to restate here is largely a byproduct of Saudi and Russian production cuts combined with stronger-than-expected demand. If you strip out energy and food prices – which the Fed prefers to do – then the PCE core price index rose just 0.1% in August. That’s quite modest.
Year-over-year, August inflation came in at 3.9%, which is a steady improvement from previous annual readings. Take a look at the table below, and you can see inflation’s steady descent.
Percent Change From Same Month One Year Ago
Here’s a look at the PCE price index (red line) and the PCE core price index (blue line) in chart form. To your point, the PCE price index has been influenced by higher gas prices, as you can see in the slight uptick of the red line. But core prices, which offer the Fed a better understanding of underlying inflation forces, continued in a downtrend.
Another way of zooming out to think about inflation is to look at the 3-month rolling annualized inflation rate, which provides insight as to how inflation is trending. From that vantage, core prices rose at a 2.2% annualized rate in August, which is of course very close to the Fed’s 2% target. That would also qualify as good news, in my view.
Overall, I think August’s inflation data is positive enough that the Fed will decide to hold rates steady again at their upcoming October 31 – November 1 meeting. I’m not sure anyone at the Fed is declaring victory over inflation with August’s data, but I’d venture that a few officials are breathing a sigh of relief that price pressures continue abating.
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Disclosure