Checking in on the PCEPI
The Fed's main inflation gauge
The Fed’s preferred measure of inflation—the PCEPI—is cooling off, according to the latest data dropped by the Bureau of Economics Analysis. This inflation gauge showed consumer prices increasing by only about 0.1 percent over the month of April (the latest observation reported today by the BEA). On an annualized basis, that is about 1.2 percent.
Figure 1 displays the annualized monthly increases over the past 12 months.
While not as low as last month (or 12 months ago), 1.2 percent is relatively tepid compared to most months this past year.
If we look at this measure on a year-over-year basis, we see that inflation appears to be heading in the right direction. Figure 2 displays the year-over-year values for each month the past year.
Recall that what “year-over-year” reveals is that for April, prices increased by about 2.1 percent relative to last April. This measure of inflation, in contrast to the annualized monthly values displayed in Figure 1, provides a “smoother” way of assessing inflation’s evolution over time.
The value 2.1 percent is important for at least a couple of reasons.
This is pretty darn close to the Fed’s target inflation rate of 2.0 percent. And, since the PCEPI is the price index the Fed pays attention to the most (more so than the CPI, assessed by Macrosight a few weeks ago here), having the PCEPI come in at 2.1 percent is important for assessing the Fed’s future policy moves.
With respect to said policy moves, the last time the PCEPI rate of inflation equaled 2.1 percent the Fed cut its target interest by 50 basis points.
Both points suggest a greater chance the Fed may once again lower its interest rate target sometime this summer, perhaps even at its meeting next month.
Hello Rae,
Thanks for your comment. I do not disagree. I don't necessarily think the Fed *should* lower their target. In a sense I'm laying out how I infer they make their decisions--"they" being the current members of the FOMC and Jerome Powell. By that I mean I look at their past decision(s) and make a guess on how they might act in the near future, given how the data looks now compared to how it looked when they made some previous decision. But, yes, I definitely see your point!
If PCEPI is at or near target level, and unemployment is at or near the target rate for full employment, what would be the rationale for disturbing the current equilibrium? I would argue that these values support making no change. The interest rate on Treasury debt is being driven by an irrational trade policy. Why encourage that irrationality by lowering interest rates generally?