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January PCE of 2.4% is Consistent with Expectations

This morning, we got the January Personal Consumption Expenditures (PCE) report. This is the preferred inflation gauge of the Federal Reserve. The PCE was up .3% vs last month and 2.4% vs last year. The Core PCE, which excludes food and energy, was up .4% vs last month and 2.8% vs last year. All of these were consistent with expectations.


The report is a bit of a mix with continued declines in the yearly comparisons which you can see in the chart below. The monthly comparisons have started to reaccelerate. The headline PCE had seen monthly increases between 0.0% and 0.1% during the past three months. The Core PCE was in the 0.1% to 0.2% range. A 0.4% increase might not seem like much, but it annualizes to 4.9% which is almost 2.5x the target. It’s also a reversal from the past few months of lighter inflation numbers.

There were a couple of surprises in this report. Personal income was up 1% which beat the 0.3% forecast. Consumer spending, which has been running high for months, was down 0.1% which was below the estimate for positive 0.2%. There’s always some noise in the monthly numbers, but with income up and spending down, it’s possible that inflation is understated and that families are feeling more pricing pressure than the official numbers indicate. The chart below is the absolute value PCE which shows prices continuing to rise even if they’re doing so at a slower pace.

DKI has been saying for two years that rate cuts will come later than most market participants expect and that we won’t see 6 cuts (for a total of 1.5%) this year. No change in opinion. if you have any questions.


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