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October Personal Consumption Expenditures (PCE)
Foreword: Personal Consumption Expenditures is the Federal Reserve’s preferred measure of inflation, and the FED’s 2% price stability objective refers to 2% Personal Consumption Expenditures (headline measure, annual changes)
The Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending.
One advantage PCE has over Consumer Price Index (CPI) is its dynamic weight. Since PCE is measured by expenditure, monthly shifts in spending will change the index weight of different PCE categories. In comparison, the BLS updates CPI’s weight annually.
It is also helpful to focus on the divergence between goods and services inflation. Goods inflation is sensitive to import prices from foreign countries (which pass-through changing commodity prices), and services inflation is more correlated with U.S. labor market conditions.
On a year-over-year basis, the October PCE came in a touch softer than expected:
Headline PCE at 0.218% YoY vs. 0.3% consensus
Core PCE at 1.273% YoY vs. 1.4% expectations
Goods (including food, gasoline and other energy goods) rebounded a touch to -3.11% YoY vs. -3.20% prior
Core goods (ex-food and energy) weakened further to -0.81% YoY vs. -0.59% prior
Services (including housing utilities) mostly unchanged at 1.88% YoY vs. 1.86% prior
Core services (ex-utilities) rose to 1.96% YoY vs. 1.89% prior
The declines in the core goods category illustrates further pass-through impacts of lower import prices from China (please see the Appendix 4), while overall goodscategory continue to be weighed down by energy prices. Nevertheless, overall strength in the services sector is still holding strong. This corroborates October CPI’s strong services sector readings.
In conclusion, this report should not alter policymakers’ inflation outlook going into December. A rate hike at the December FOMC is currently 83% priced-in as of Nov 25th 2015 (please see Appendix 5).
Appendix 1: October PCE (YoY)
Appendix 2: October PCE (YoY) – Major Categories
Appendix 3: October PCE (MoM) – Major Categories
Appendix 4: Import Price Index – All Commodities From China
Appendix 5: Market-implied December “liftoff” Probability
Next article11 25 2015 | by Victor Xing | Capital Markets