Inflation Didn’t Leap

February 29, 2024

On February 29th (happy leap day!), the Federal Reserve’s preferred inflation measure – Personal Consumption Expenditures (known as Core PCE) was released for the month of January 2024. (Note: Core PCE excludes food and energy, which can be very volatile.)

Core PCE increased 0.4% for the month and 2.8% year-over-year, exactly in line with expectations on both metrics. The monthly change outpaced December’s (which was 0.1%) but the year-over-year metric fell from December’s reading of 2.9% showing that cumulative progress is still being made

Note: Headline PCE (adding back food and energy) was also in line with expectations, increasing 0.3% for the month and 2.4% for the year over year period.

The report once again supported the ongoing trend in spending – namely a preference for services over goods. Services prices rose 0.6% on the month, while goods’ prices fell 0.2%. The bulk of the increase in services was within Financial Services category (0.2% of the 0.6%), which aligns with the marked increase in the stock market in 2023 and into January 2024. The three next highest contributors were hospital services, food services and accommodation, that combined for another .17% of the 0.60% increase.

This report affirms that the path back to the Fed’s preferred target of 2% is well underway but that the end of the journey may be at least somewhat bumpy. The dominance of services – and the seemingly insatiable demand for them by consumers as the funds they have to pay on goods keeps falling – will likely challenge the downward trend.

Adding to the spending blitz is the strength in earnings, which was shown in January’s personal income measure rising 1% for the month (well above the 0.3% estimate). Some of that increase is due to a rise in Social Security payments (cost of living adjustments go thru in January), as well as jumps in investment income on market strength, but the rest comes from higher wages across the spectrum.

Bottom line is that the consumer has remained far more resilient than many expected, which is propelling the US economy (one heavily reliant on consumer spending) forward at a record pace. The trade-off to this ongoing growth in the economy may very well be stickier inflation (with the resulting “higher for longer” interest rates). Based on market’s muted reaction to the inflation print, investors are fine taking the good with the slightly “less good.”

Onward we go,

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