By Wolf Richter for WOLF STREET.
The “Core” PCE price index, the Fed’s primary yardstick for its 2% inflation target, rose by 2.7% from a year ago in August, the second slight acceleration in a row, and the biggest increase since April (red in the chart below). This “core” index attempts to show underlying inflation by excluding the components of food and energy as they can jump and drop with commodity prices.
The overall PCE price index, which includes the food and energy components, rose by 2.2% year-over-year in August, a deceleration, on plunging energy prices (-10.1%) and slower rising food prices (+1.1%).
The “core services” PCE price index increased by 3.8% in August year-over-year, the first acceleration since March, on accelerating housing costs (yellow). The durable goods PCE price index fell less than in the prior months, in August by -2.2% year-over-year, the smallest drop since April (green):
The month-to-month moves.
The “core” PCE price index rose by 1.6% annualized in August from July (not annualized, +0.13%), a deceleration from July (blue in the chart below).
Within it, two forces – core services and durable goods – pulled in opposite directions as durable goods prices continue to deflate from the pandemic spike.
The six-month annualized core PCE price index, which irons out the month-to-month squiggles and includes all revisions, decelerated to 2.4% annualized (red):
The “core Services” PCE price index rose by 2.8% annualized in August from July (+0.23% not annualized), second deceleration in a row.
The six-month core services index rose by 3.3% annualized (+0.27% not annualized), the first acceleration since April.
Core services include housing, healthcare, financial services & insurance, transportation services, non-energy utilities, communication services, recreation services, food services & accommodation, and “other” services.
The housing costs PCE price index, which is part of core services, jumped by 5.7% annualized in August from July (+0.47% not annualized), the second month in a row of sharp acceleration.
The six-month index rose by 4.9% annualized, the first acceleration all year.
Year-over-year, the housing costs PCE price index accelerated for the first time since April 2023, rising by 5.3%. Stubbornly high housing inflation – which has remained high against all predictions – has long frustrated Powell.
Durable goods PCE price index fell in August from July by 2.9% annualized (-0.24% not annualized). The six-month index also fell by 2.9% annualized.
Durable goods include motor vehicles, recreational goods and vehicles, appliances, electronics, furniture, etc.
The index tends to run in a slightly negative range during normal times amid manufacturing efficiencies, technological improvements, and globalization. It’s the services that have been the driving force of inflation for many years. But during the pandemic, durable goods prices spiked massively due to the sudden demand fueled by the stimulus funds, and that exaggerated demand hit tangled-up supply chains. The resulting shortages and consumers suddenly willing to pay whatever gave companies enormous pricing power. So now, the PCE price index for durable goods is roughly back to normal:
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