Price Index For Personal Consumption Expenditures Lower In February Than In January

by: John M. Mason

Summary

Fed officials closely watch the price index related to PCE in discussing whether or not the Fed should keep interest rates constant or raise them.

The price index for PCE had been rising through the fall and into January and this had raised expectations that the Fed was building reasons for a rate increase.

The higher inflation numbers have been achieved by rising rates of increase in the prices of services and the declining rate of decrease in other prices.

In this age of up and down signals from economic statistics, we see that the increase in the Fed's primary price index dropped in February from the increase recorded in January.

In February, the year-over-year increase for the price index for personal consumption expenditures dropped to 1.0 percent from a revised 1.2 percent in January.

Looking at the price index of PCE excluding food and energy, we see the year-over-year rate of price increase remaining constant at 1.7 percent.

Analysts had been getting excited since the year-over-year rate of increase in both measures had been increasing since October 2015.

The reason for this excitement is that the Federal Reserve watches this measure of inflation closely when making decisions about whether or not to raise its short-term policy interest rate. Over the past year or so, the rate of inflation using this measure was quite low and substantially below the Fed's desired target rate of inflation of 2.0 percent.

The excitement comes from the possibility that if inflation seems to be picking up, then Fed officials might be more inclined to raise rates.

In the third quarter of last year, the rate of inflation of the total index was around 0.3 percent, while the rate of inflation of the index excluding food and energy was stuck at 1.3 percent.

So the rise in the fourth quarter into the first month of 2016 seemed to be positive for a Fed move.

Looking closer at the figures just released, we see that the rise in the total index was composed of a rise in inflation in Services and a reduction in the decline in the prices of goods. Inflation in the prices of services was steady through the summer and fall of 2015 and continued to rise in January and February.

The deflation in the prices of goods seemed to be most dramatic in Nondurable Goods, especially in January, when compared with the decline taking place in the July through August period. However, in February, the decline in prices accelerated again although not at the pace achieved earlier.

Durable goods prices have been falling at a decreasing pace, year over year, through January. The rate of decline rose again in February.

In terms of the food index, food prices have been dropping, year over year, for the past three months, December through February.

Year-over-year price changes in energy and energy services are also still declining, although not as rapidly as they were in the third quarter of the year.

So, overall, price inflation in the United States, year over year, has been increasing but primarily because the rate of inflation in Services has been increasing, while the rate of deflation has been declining in all other areas.

This change has been reflected in the bond markets as the inflationary expectations built into the yield of the 10-year government bond rate has risen from about 1.2 percent in February of this year to around 1.6 percent at the end of last week. Apparently, though last week, investors were accepting the Fed's interpretation of future inflation and building this into bond prices.

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