Fed officials like Jerome Powell have long downplayed CPI as a price inflation measure in favor of the PCE index. But, much like CPI, the PCE measure is now also hitting 40-year highs. In new data released today for June, the personal consumption expenditures price index rose 6.8%, the biggest 12-month move since the 6.9% increase in January 1982. Excluding food and energy, the “core PCE” increased 4.8% from a year ago, up one-tenth of a percentage point from May.
The core PCE’s month-over-month change was 0.6%, its biggest monthly gain since April 2021.
This number comes in the wake of July 13’s release showing 9.1% CPI inflation for June, which was the biggest increase since November 1981, when the price growth measure hit 9.6 percent year over year. For several reasons (explained here) the PCE shows lower price growth than CPI in many cases. Yet, in the case of PCE, as with CPI, the Fed’s target policy interest rate remains remarkably low for today’s 40-year highs in price inflation:
In recent months, the FOMC has repeatedly raised the target rate, with the rate now reaching 2.5% as of the July meeting. Wednesday’s 75 basis point hike puts the target rate at the highest since 2008, and equal to the rate reached in 2019 before the Fed reversed course as began to push easy money again as the economy softened late that year.
The overall story here is that there is still no sign that “peak inflation” has been reached, as wages continue to fall behind price inflation.
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PCE remains “the Federal Reserve’s preferred measure of inflation.” According to the Bureau of Economic Analysis,
The Personal Consumption Expenditures Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. For example, if the price of beef rises, shoppers may buy less beef and more chicken. The PCE Price Index is produced by the Bureau of Economic Analysis (BEA), which revises previously published PCE data to reflect updated information or new methodology, providing consistency across decades of data that’s valuable for researchers. They also offer the series as a Chain-Type index, as above. The PCE price index is used primarily for macroeconomic analysis and forecasting. The PCE Price index is the Federal Reserve’s preferred measure of inflation. The PCE Price Index is similar to the Bureau of Labor Statistics’ consumer price index for urban consumers. The two indexes, which have their own purposes and uses, are constructed differently, resulting in different inflation rates.
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