PCE Price Index Update: Core PCE Remains At Historic Low

by: Doug Short

The June Personal Income and Outlays report for May was published today by the Bureau of Economic Analysis.

The latest Headline PCE price index year-over-year (YoY) rate of 1.02% is an increase from last month's adjusted 0.73%. The Core PCE index of 1.06% is little changed from last month's 1.05%, which is lowest Core PCE ever recorded.

As I pointed out last month, the continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for 10 of the last 13 months since its interim high of 1.96% in March of 2012 and is now little more than half that YoY rate.

The first chart shows the monthly year-over-year change in the personal consumption expenditures [PCE] price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

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I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.

For a long-term perspective, here are the same two metrics spanning five decades.

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Note: I use the data from Table 9 in the full release and tables available here.