Sunday, 18 of February of 2018

Economics. Explained.  

Personal Consumption Expenditures Deflator

January 30, 2018

There are many different measures of inflation, but the one that the Federal Reserve considers to be most important is the personal consumption expenditures deflator, in particular the PCE deflator excluding the volatile food and energy components.

The PCE deflator rose 0.1% in December after having risen 0.2% in November.  The year-over-year increase now stands at 1.7%.

Excluding the volatile food and energy components the PCE deflator rose 0.2% in December after having climbed 0.1% in November and 0.2% in October.  The year-over-year increase is now 1.5%.  However, in the past three month it has escalated to 1.9%.  It was held down in first half of last year by a price war in the wireless cell phone industry and falling prescription drug prices as Trump is putting pressure on the industry.  Falling prices in those two sectors has come to a halt.  This is the inflation measure that the Fed would like to see rise by 2.0%.   We think it will reach 1.8% by the end of 2018.  This inflation gauge has gone from being far below the Fed’s inflation target to being just below target.

The more widely known inflation measure, the CPI ex food and energy, has been rising at a somewhat faster pace and is projected to increase 2.4% overall n 2018 with a  2.2% increase for the core rate (excluding the volatile food and energy components).

Why the difference?  The CPI measures price changes in a fixed basket of goods each month.  The deflator captures price changes, but also changes in consumer spending habits.  If we try to save money by switching from butter to lower-priced margarine, from beef to chicken, or if builders substitute PVC pipe for more expensive copper,  the deflator would come in lower than the CPI in that particular month.  For our money, we think that the CPI which strictly measures price changes is a better barometer of inflation.  The Fed disagrees.

Stephen Slifer

NumberNomics

Charleston, SC


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