What just happened?
The US Personal Consumption Expenditure Price Index (PCE) for August, or PCEPI as the US Federal Reserve (Fed) calls it, recorded an annualized rate of 2.2% year-on-year on August 27. September, the lowest figure for this key inflation indicator since March 2021. This is an important step for the Fed to claim ‘victory’ over inflation, as price indices continue to approach the central bank’s overall target of 2% annual PCE inflation.
Despite the positive PCEPI headline inflation figure in August, several obstacles remain to the Fed’s policy goals. Core PCEPI, a measure of PCE inflation that excludes food and energy prices, which are subject to seasonality and volatility, increased to 2.7% year-on-year in August, implying that underlying price pressures still persist.
Why does PCE inflation matter?
The PCEPI is a key indicator in the Fed’s broad set of metrics. The Fed generally prefers the PCEPI over the widely followed Consumer Price Index (CPI), because the basket of goods and services used to track the PCEPI is adjusted on a more regular basis and includes out-of-pocket spending for both urban and rural communities. CPI inflation metrics only consider consumer spending in urban regions, and the CPI index is updated semiannually, compared to the PCEPI’s quarterly rebalancing. Because of this, the Fed gives greater weight to changes in PCEPI numbers when setting targets and debating policy changes.
What happens next?
With the PCEPI numbers continuing to move toward the Fed’s price targets (albeit unsteadily), the Fed and global markets will focus on the next round of key U.S. jobs and employment numbers. The Fed will also will look for confirmation signs in other inflation indicators, such as the monthly CPI figure, to confirm that inflation will continue in the preferred direction.
Economic indicator
Personal consumption expenditure – price index (YoY)
Personal consumption expenditure published by the Bureau of Economic Analysis, Department of Commerce It is an estimate of the amount of money consumers spend in a month. It is a significant indicator of inflation. A result above expectations is bullish for the dollar, while a reading below consensus is bearish.
Last post: Fri Sep 27, 2024 12:30
Frequency: Monthly
Current: 2.2%
Dear: 23%
Previous: 2.5%
Fountain: US Bureau of Economic Analysis
Inflation FAQs
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
