July PCE Price Inflation - Fed Stays on Hold at September Meeting?
Whew! Including all items, the July PCE price index advanced 0.3% month to month. Excluding food and energy, it was up just 0.1% after three consecutive months of 0.2% increases. On a year-over-year basis, the all-items PCE price inflation rate moderated marginally from 3.5% in June to 3.4% in July (see Chart 1). If recent days' energy price declines hold, then the Fed can look forward to lower year-over-year all-items consumer inflation going forward. The year-over-year change in the core PCE price index for July held at its June rate of 2.4% (rounded). Although still above the Fed's implicit target range, at least it did not move even farther out of range. Because of a pick up in month-to-month core price increases in September and October of 2005, year-over-year comparisons could become more benign in the months ahead.
Chart 1
The increase in core consumer inflation is largely attributable to faster increases in the rent of shelter (see Chart 2). Outright price deflation continues to be the story for consumer durable goods. The pace of increases in the rent of shelter is likely to moderate once all of the condos currently under construction are completed. Both the developers with unsold units and the spec buyers will be giving away high speed Internet access along with three months of free rent to fill these urban see-throughs.
Chart 2
Q3 Consumption Off To Strong Start, But ...
Adjusted for prices, personal consumption expenditures jumped 0.5% in July. Increases were reported for all major categories - durable goods, nondurable goods and services. Consumption got a big lift from the 3.25% (month-to-month) increase in sales of motor vehicles and parts. That's not likely to be repeated in August, which we will find out about on Friday. The consensus, which occasionally is right, is looking for a drop in car and truck sales for August. Moreover, when seasonally adjusted, same-store sales for the chains in August were reputed to be down 0.6% by the folks at ICSC after having increased 1.1% in July. Unless households totally boycott the malls and car dealer lots, real consumption growth is likely to be somewhat better than the second quarter's 2.6% annualized - around 3% or a touch above. But as the chart below shows, the trend is not the retailers' friend anymore.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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