PCE Price Index: Headline and Core Little Changed, Remain Below Target

August 1, 2014

by Doug Short

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

The latest Headline PCE price index year-over-year (YoY) rate of 1.60%, down from the previous month's 1.66% (a downward adjustment from 1.77%). The Core PCE index of 1.49% is is a downward ajustment from 1.53% (an upward revision from previous month's 1.49%.

As I've routinely observed, the general disinflationary trend in core PCE (the blue line in the charts below) must be perplexing to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year had hovered in a narrow YoY range of 1.21% to 1.10%. The three most recent months have broken above the range, but at this point we don't yet see evidence of an upward trend.

The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I've highlighted the narrow 12-month range that has been breached to the upside for the past three months.

The first chart below 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 2012 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.

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