U.S. Core PCE Inflation is Still Not Coming DownJune 02, 2023
In the United States, Core PCE Inflation is still 5.0% after a recent reversal in disinflation. This measure is followed by the Fed and excludes volatile food and energy inflation. It has remained elevated on an annualized quarterly basis, with a 1-year percent change of 5.0%, and a quarter-over-quarter annualized rate of 4.67%, well above the Fed’s goal of 2% inflation. Below (in blue) we see that Core PCE ticked back up last quarter.
Even on a month-over-month basis, its annualized rate is 4.56%.
An alternative measure is the so-called “Supercore” inflation measure also known as Core CPI Services Less Housing. Fed Chair Powell focuses on this measure because it largely captures wage prices, which historically have been linked to inflation expectations. Supercore inflation is also still above 5%, but the most recent 1-month annualized level is 1.32%, which is a good sign. While one month is arguably not sufficient to predict the annual trend, using a slightly larger window of the past three months, we get 4.04% annualized rate for this measure, showing the trend is moving down, but slowly.
There are some green shoots in the Fed’s disinflation fight. Today’s payroll report showed weekly hours down to 34.4 vs. the 2021 high of 35 hours. However, other costs remain elevated, such as Owners Equivalent Rents, which is currently at a whopping 8.1% year over year. The timelier Zillow Residential Observed Rent Index is not presenting a much rosier picture with a year-over-year change of 5.26%, and a month-over-month annualized rate of 7%.
The next important measure of inflation will be the June 13 release of CPI, which takes place on the first day of the Fed’s June FOMC meeting. Currently the market predicts the Fed will wait and see how the effects of the fastest policy rate increase in a generation trickle through to the economy, and depending on how June data comes out, may raise in July.
Bloomberg US Interest Rate Probabilities: