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02 26 2016 | by Victor Xing | Economics

January PCE: services inflation surge as energy stabilize

January PCE beat expectations

Personal Consumption Expenditures, the preferred measure of inflation for the Federal Reserve, rose sharply in January to mirror a similar rebound in the Consumer Price Index.

Contrary to market expectations, headline PCE grew 0.1% MoM vs. 0.0% consensus despite continued weakness in energy prices, and Core PCE rose at 0.3% MoM vs. 0.2% expectations.  On a year-over-year basis, headline PCE and Core PCE rose at a rate of 1.245% and 1.673%, respectively (versus Federal Reserve’s price stability objective of 2.0% headline PCE)

Month-over-month changes:

  • Headline PCE at 0.103% MoM vs. 0.0% expectation and -0.067% prior
  • Core PCE at 0.259% MoM vs. 0.2% consensus and 0.085% prior
  • Services at 0.271% MoM vs. 0.139% prior.  This is the highest monthly reading since March 2014
  • Goods at -0.252% MoM vs. -0.498% prior
  • Durable goods at 0.112% MoM vs. -0.052% prior
  • Energy goods at -2.912% MoM vs. -3.000% prior
January PCE
January PCE – month-over-month changes

Year-over-year changes:

  • Headline PCE at 1.245% YoY vs. 0.678% prior
  • Core PCE at 1.673% YoY vs. 1.461% prior
  • Services at 2.094% YoY vs. 1.912% prior
  • Goods at -0.479% YoY vs. -1.843% prior
  • Durable Goods at -0.919% YoY vs. -1.187% prior
  • Energy Goods at -5.232% YoY vs. -12.402% prior
January PCE - year-over-year changes
January PCE – year-over-year changes

Policy implications

Concerns over energy-induced weakness in headline PCE, as well as non-oil import prices’ pass-through impacts on Core PCE had dominated recent Federal Reserve policy deliberations.  Some policymakers responded to the global uncertainty and downside risks to inflation by revising down their economic projections, but a number of market participants went a step further to call the central bank’s decision to begin policy normalization in December 2015 a “policy mistake.”

Yet, these nascent signs of inflation rebound would serve to boost one of the FED’s long-standing arguments: inflation will “rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate” – an outcome that had been discounted by financial market participants amid recent tightening of financial conditions and energy volatility.

Furthermore, the magnitude of the January rebound is worth noting.  If headline PCE can achieve a 0.103% monthly advance during a month of energy price decline, then there is an elevated risk of an upside surprise in February, where oil has been largely range-bound amid notable intraday volatility.

January PCE - WTI crude futures
WTI crude futures

Next article02 19 2016 | by Victor Xing | Economics

January CPI: rebound across sectors