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The Fed's Favored Measure

CAMS Weekly View from the Corner - Week ending 9/29/23


October 2, 2023


This past Friday we received updates on the Federal Reserve’s preferred price inflation measurements via the Personal Consumption Expenditures Chain-type Price Index. This has been an often referenced Price series from the Federal Reserve for many years.


Like the Consumer Price Index there are subsets of data points which isolate particular aspects of the price inflation storyline. As a general description some progress is being made in the continued reduction in the growth of prices and yet is not occurring across the board. They do have one aspect in common though which we will allow the data to highlight for us.

The above chart depicts the PCE Price Index dating back to year 2000 for some 21st century perspective. The current read on PCE prices is 3.5% year-over-year growth.


The above primary PCE Price Index, via our small red circle, reflects the growth of prices has ticked upward. The red circle denotes two consecutive months of the growth in prices trending upward again. Importantly, the two months combined net out to 30 basis points of increase so not a cause for alarm at this juncture.


What this does underline though is the growth in prices is not disappearing as many had hoped or even expected.

The above also dates back to year 2000 and denotes the PCE Price Index less Food and Energy. Being food and energy historically have a more volatile price history excluding them is often referenced and meant to get a clearer sense of the underlying growth in general prices.


For our part there are much better measures to determine this such as the Cleveland Fed’s Median CPI measure which we have chronicled many times throughout editions over recent years.


Nonetheless the above is often referenced so we share it and see this registered a 3.9% growth rate which continues its recent decline. Via our small red arrow our current growth rate in this price inflation measure takes us back to June of 2021.


The above chart also dates back to year 2000 but here we go a bit more under the surface of the mainline PCE Index. That above denotes the PCE Services growth in prices.


The current read here registers 4.9% which via our small red arrow walks us back to November of 2021. We have shared this measure several times in recent editions as Chairman Powell of the Federal Reserve has referenced the stickiness of Services price inflation and through this the concern of the overall price inflation story.


Being Services represent a significant portion of daily economic life for the citizenry this stickiness is a real concern.


As we step back a bit and place the most recent read into context we can see this 4.9% increase is a mere 1% lower than the ultimate high mark. Progress yes but when placing the progress into a larger context we get a better sense of how small the progress has been which feedback loops to this area’s relentlessness of trend.


The 2% Objective


The Federal Reserve has been on record in recent decades underlining their overall 2% price inflation objective. If price inflation would get too low – think sub 2% - they would emphasize they want to see prices rise by 2% and hence would want to see price inflation increase.


As an aside, reading that accurately what they have been telling the citizenry for as many years is they want to see the currency become worth-less in its strength/purchasing power each and every year. It is baked in the cake per their cemented objective.


Moving on we also see the Fed emphasizes this when prices rise north of 2%. Chairman Powell has emphasized repeatedly in this price inflation era they have not and will not relinquish their 2% objective.


As an additional aside, we could not help but ask (and in-house nearly scream) why they had such little concern for the 2% objective when prices were blowing higher and higher to kick off this price inflation era back in very early 2021? This as they watched and emphasized it was all transitory.


Importantly, this was their central messaging while they left their benchmark Fed Funds Interest rate set at a ridiculous 0% while simultaneously continuing to print money to feed into the ever higher spiking housing prices as well as general prices. History shows they waited an entire year – yes twelve months – before they even began to raise interest rates and initially when doing so raised very slowly.


Price inflation jumped out of the gate and gained a tremendous head start on the timeline before even an initial paltry attempt was made at fighting it from the Fed.


This brings us full circle to current day. What do all three charts above have in common dear reader?


We invite you to review the charts again and pay special attention to our red horizontal lines placed on each. These lines denote the 2% level for each and speak to the Fed’s 2% price inflation objective. Note the considerable distance we have yet to travel.


We have shared this perspective numerous times over various editions and will share it here yet again: Historically, when a notable price inflation era kicks off and takes hold it does not end until recession comes in to aid its demise.


With as much attention that the reduction in price growth rates have gotten and with continued expectations of such our red lines identify just how far we have yet to go as we continue to ask, using history as our guide, will it ultimately be a recession that plays a notable role in meeting the Fed’s 2% objective?


If so, again using history as our guide (and bringing some market perspective into this edition) the stock market drops notably as company revenues and profits drop precipitously. This while our current stock market, on a valuation basis, remains historically very high - not a good combination.


It all relates and what may seem like one having little to do with the other our above red lines on the Fed’s self-described favored measures feedback loops to various economic and market(s) performance.


Price inflation is not dead and yet the central question is will its rate of growth be able to continue to reduce notably to achieve the Fed’s 2% objective and can this take place without recession? We will continue to share details as this price inflation/economic growth story unfolds.


I wish you well…


Ken Reinhart


Director, Market Research & Portfolio Analysis

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