Wednesday, 20 of June of 2018

Economics. Explained.  

Personal Consumption Expenditures Deflator

June 10, 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 0.2% in April after having been unchanged in March.  The year-over-year increase now stands at 2.0%.

Excluding the volatile food and energy components the PCE deflator rose 0.2% in February, March, and April.  The year-over-year increase is now 1.8%.  This is the inflation measure that the Fed would like to see rise by 2.0%.   We think it will reach 2.0% by mid-summer and remain at the 2.0% mark for 2018 as a whole.  This inflation gauge has gone from being far below the Fed’s inflation target to being just below target currently.

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  2.4% increase for the core rate (excluding the volatile food and energy components).  For details of this forecast see the CPI write-up.

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


Charleston, SC

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