And a look back at the head-fakes core services inflation dished up last time with this type of inflation.
By Wolf Richter for WOLF STREET.
So right up front – and the Fed has been talking about this, though no one listens: The “core services” PCE price index has gotten stuck at 3.5% over the past six months annualized, and accelerated to 4.0% month-to-month annualized in December, with housing inflation stuck at about 6.7% over the past six months annualized, and with other core services components still red-hot.
The core services PCE price index rose by 0.33% in December from November, the second acceleration in a row, according to data from the Bureau of Economic Analysis today. This amounts to an increase of 4.0% annualized (blue).
The six-month moving average, which irons out the huge ups and downs of the month-to-month data, accelerated to 3.5%, and has been in this range since August, after the sharp deceleration in early 2023 (red).
Core services is where consumers spend the majority of their money, and they matter. Which is why Fed governors have said in near unison that they’re in no hurry to cut rates, but have taken a wait-and-see approach, with an eye on core services. And if it goes away, fine.
But on the surface, the PCE price index looks encouraging, and this has been the trend for months, with the overall PCE price index at +2.6% year-over-year in December, the lowest since March 2021; and with the core PCE price index at +2.9% year-over-year, also the lowest since March 2021, and aiming for the Fed’s 2% target.
The factors for the year-over-year cooling in these inflation measures have been the same for months: plunging energy prices, sharply dropping prices of durable goods after the huge spike in 2020 and 2021, cooling food inflation (with prices still rising from very high levels, but slowly), and favorable “base effects” when compared to a year ago.
But energy prices don’t plunge forever, so that will go away; durable goods prices don’t drop sharply forever either, though they can drop for a while longer to unwind some more of the price spike they’d been through in 2020 and 2021; and the base effects are going to get timed out this year, when the base of the year-over-year comparisons become the lower inflation figures of 2023.
A similar scenario has emerged in the CPI inflation index for December, which we discussed in detail with lots of charts here.
Housing inflation, still red hot and not cooling anymore. The PCE price index for housing rose by 0.46% in December from November and has been in this range since March, after the sharp slowdown early in 2023. This amounts to 5.7% annualized (blue in the chart below).
The housing index is broad-based and includes factors for rent in tenant-occupied dwellings; imputed rent for owner-occupied housing, group housing, and rental value of farm dwellings. It’s the largest component of core services.
The six-month moving average annualized, which shows the more recent trends, also rose by 5.7% in December, and has been in the same range since August (red).
So it looks like the PCE price index for housing has gotten stuck at 5.7%. This stubborn inflation in housing is a blow to theories trotted out for 18 months that housing was lagging, and that we know it will go away as an issue, etc., etc. The increases are less hot than they had been, but remain hot and have become persistent.
The major categories of core services in the PCE price index, as a six-month average of month-to-month changes, annualized:
Core services, major categories, 6-month average, annualized
Housing
5.7%
Description and chart above
Non-energy utilities
2.5%
Water, sewer, trash
Health care
2.5%
Physicians, outpatient, hospital, nursing care, dental, etc.
Transportation services
6.1%
Auto repair & maintenance, auto leasing & rentals, public transportation, airfares, etc.
Recreation services
5.6%
Concerts, sports, movies, gambling, streaming, vet services, package tours, etc.
Food services, accommodation
2.8%
Meals & drinks at restaurants, bars, schools, cafeterias, etc.; accommodation at hotels, motels, schools, etc.
Financial services
3.5%
Fees & commissions at banks, brokers, funds, portfolio management, etc.
Insurance
2.8%
Insurance of all kinds, including health insurance
Other services
0.1%
Collection of other services
Inflation in Transportation services and Recreation services is accelerating on the basis of the 6-month moving average, with the PCE price index for Transportation services rising by 6.1%, and the index for Recreation services rising by 5.6%:
The head-fakes last time.
Inflation in services turns out to be tough to beat, and it can dish up big head-fakes. Last time we had this type of surge of inflation, so that was in the 1970s and 1980s, we thought repeatedly that we had inflation licked, only to find out that we’d fallen for an inflation head-fake. There were three head-fakes in core services on the way to the peak of 11% in 1981:
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