AFMC - Services Inflation Rages At Worst Rate Since 1984 Keeps 'Core PCE' In High Range
2023-04-01 04:33:00 ET
Summary
- On a year-over-year basis, the PCE price index without food and energy products (“core PCE”) jumped by 4.6% year-over-year in February.
- Within the core PCE index, the PCE price index for durable goods rose just 0.7% year-over-year.
- The PCE price index for services jumped by 5.6% year-over-year in February, same as in January, and both are the worst since 1984.
Nearly two-thirds of consumer spending goes to services. That’s where the inflation action is.
Energy prices continued to drop, and prices of some goods dropped from the crazy spike in 2021, and food prices are increasing at a more moderate rate. We have seen these trends for months. But the element that makes up nearly two-thirds of consumer spending – services – the element that the Fed has been pointing out for months, remained at the worst level since 1984, and it kept core inflation at nose-bleed levels at well over twice the Fed’s target.
Core PCE price index: the yardstick for the Fed’s inflation target
On a year-over-year basis, the PCE price index without food and energy products (“core PCE”) jumped by 4.6% year-over-year in February, after having jumped by 4.7% in January, and by 4.6% in December, essentially unchanged for the past three months, according to the Bureau of Economic Analysis today. The Fed’s inflation target is 2%, and it uses this core PCE index as primary yardstick.
Within the core PCE index, the PCE price index for durable goods rose just 0.7% year-over-year, but the PCE index for services spiked by 5.6%.
On a month-to-month basis, the core PCE price index has been jumping up and down in the same range since 2021. In February, it rose 0.3%, after the 0.5% jump in January and 0.4% in December.
This chart shows the three-month moving average of core PCE’s month-to-month changes, which smoothens out the month-to-month volatility and shows the trends more clearly:
Inflation continues to rage in services
Powell, in every press conference since mid-2022, has been pointing at the services components of the PCE price index as the hotspot of inflation, where inflation is raging, and where it is very difficult to extinguish. Services account for nearly two-thirds of consumer spending.
The PCE price index for services jumped by 5.6% year-over-year in February, same as in January, and both are the worst since 1984:
On a month-to-month basis, the PCE price index for services jumped by 0.3% in February from January, and has been jumping up and down in the same high range since 2021. The chart shows the three-month moving average, which smoothens out the month-to-month volatility and shows the trends more clearly:
Durable goods prices cool from the crazy spike
The PCE price index for durable goods – new and used vehicles, appliances, furniture, electronics, etc. – dipped by 0.2% in February from January, having been in the same range above and below the zero-percent line for a year, after the huge spikes from late 2020 through 2021.
This brought year-over-year durable goods inflation down to just 0.7%. A big driver in this has been the sharp decline in used vehicle prices from the crazy spike in 2021:
The PCE price index for energy fell 0.4% month to month, which pushed down the year-over-year increase to 6.4%, the least terrible jump in two years, and down from the +30% range in mid-2022.
The PCE price index for food rose 0.2% in February from January, which pushed down the year-over-year increase to 9.4%, the least terrible since April 2022, down from the double-digits in between.
The overall PCE price index for all items rose by 0.3% in February from January, and by 5.0% year-over-year:
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Services Inflation Rages At Worst Rate Since 1984, Keeps 'Core PCE' In High Range