Inflation

Inflation

Core inflation has accelerated, and is anyone surprised? 

Inflation was in services, and it continues to be.

A large portion of consumer spending goes on services. Durable goods prices have also increased for the second consecutive month after big drops, and food prices kept heading higher too.  

The only drag on inflation is gasoline prices, which continue to come down, according to the PCE price index by the Bureau of Economic Analysis today. 

So, by the Fed’s favourite measure for inflation, the PCE price index, the Fed’s inflation target of 2% appears to be disappearing into the mist of data.

Nearly all, three of the four, inflation metrics accelerated last month, October. The overall PCE price index rose to +2.3%, the “Core” PCE price index, to +2.8%, and the worst increase came from the Core Services PCE price index to +3.9%. The durable goods PCE Price index has also started rising. 

With inflation rearing its head again, the Fed is already managing expectations of more fast and furious rate cuts as being now less likely

Inflation indexes in the final quarter of 2024 are way down compared with 2022, but they all appear to have flatlined for a bit above the Fed’s 2% inflation target, except durable goods, and they are all pointing upwards.  

Core inflation continues to be the driver of inflation

The PCE price index for core Services jumped to +4.4% annualized in October from September (+0.36% not annualized), the sharpest increase since March (blue in the chart below). The three-month core services index accelerated to 3.8% annualized.

Core services include various items, such as housing, healthcare, insurance costs, financial services, transportation costs, non-energy utilities, communication services, recreation services, food services & accommodation, and other services.

Core services exclude energy services for the home for lighting and climate control. 

Year-over-year, the core services PCE price index jumped to 3.9%, the fastest increase since May when this index kept heading higher. 

The “core” PCE price index accelerated to +3.3% annualized in October from September (+0.27% not annualized), the worst month-to-month increase since March.

The core index shows underlying inflation by excluding volatile food and energy as they move around with volatile commodity prices.

The 6-month core PCE price index accelerated to +2.34% annualized and has remained higher all year than at the end of last year.

So the beastly twins, inflation and debt, keep rearing their ugly heads, and the question many are asking is, will the Fed resign its inflation target of 2%? 

Has the inflation trade got legs? 

This idea centres on investors believing there is a risk or potential to gain from rising price inflation. In times of price inflation, investors tend to rotate their portfolios into assets generally more favourable in an inflationary environment.