The last time there was such turmoil, from 1966 to 1982, inflation in core services led to a flood of malicious fakes. References to interest rate hikes popped up in the Fed’s speech.
Written by Wolf Richter of Wolf Street.
Over the past year or so, the Fed has been intensely discussing “core services” inflation, shifting from goods inflation that soared until mid-2022 but cooled dramatically thereafter. ing. In other words, the “core service” is there. Core services are where consumers spend most of their money. Core services are all services except energy services. Inflation in core services has been weak in recent months, rising sharply in January.
The “core services” PCE price index jumped 7.15% annually in January from December, the worst month-over-month increase in 22 years (blue line), according to index data released today by the Bureau of Economic Analysis. . The rapid increase was due not only to housing inflation but also to non-housing measures. Each category will be explained in detail later.
The six-month moving average, which compensates for monthly fluctuations, accelerated to an annual rate of 3.95%, the worst since July (red), after staying at the 3.5% level for three consecutive months.
The bad performance of core services inflation that we’ve been lamenting since June, and confirmed by the nasty CPI surprise earlier this month, is exactly why Fed directors have almost unanimously decided to cut interest rates this year. This is why I said there was no need to rush. However, they are taking a wait-and-see attitude.and the concept of rate hiking It appears again in their speeches.
For example, Fed Director Michelle Bowman said in a speech yesterday that she is “ready to raise the federal funds rate at a future meeting if future statistics indicate that the development of inflation has stalled or reversed.” Stated.
Inflation in core services compared to previous year It has now reversed and accelerated to 4.1%.
Seven core service categories.
Core services (services that do not include energy services such as water or electricity) are grouped into seven PCE price indices, which we will look at separately.
This is where the majority of consumer spending takes place. Monthly data for these core service categories can be very volatile (blue in the chart below), so we focused on a 6-month moving average to eliminate this volatility and show recent trends. (red) in the graph below).
housing inflation is high. The residential PCE price index in January accelerated to an annual rate of 6.4% from December, the worst level since September (blue).
The 6-month moving average, which corrects for month-to-month fluctuations, shows a more recent trend, accelerating to 5.7% annually and is now in the same range since August (red).
Housing inflation has retreated from the unusual spike from 2022 to February 2023. However, it has since remained at this hot level of over 5.5%, refusing to cool further and now appears to be re-accelerating.
The housing index is broad and includes rent factors for tenant-occupied housing. Imputed rent for owner-occupied housing, apartment housing, and rent for farm housing.
financial services and insurance: Annualized monthly rate +17.2% (blue); 6-month moving average annual rate +5.5%. 3 consecutive months of acceleration (red):
Food services and accommodations: +8.25 m/m annual rate (blue). 6-month moving average annual percentage rate of +4.0%. Second month of acceleration (red):
health care: +3.5% m/m annualized (blue), 6-month moving average annualized +2.4%, and has been roughly stable at this rate for the past 5 months (red).
transportation service: Month-over-month annualized rate +0.4% (blue), 6-month moving average annualized rate +3.2% (red).
Includes automotive services such as maintenance and repairs, car and truck rentals and leases, parking fees, tolls, and public transportation from airfares to bus fares.
recreational services: Month-over-month annualized rate +4.6% (blue), 6-month moving average annualized rate +4.9% (red).
Includes cable and satellite television, radio, streaming, concerts, sports, movies, gambling, veterinary services, package tours, audiovisual and other equipment repair and rental, recreational vehicle maintenance and repair, and more.
Other services: Month-over-month annualized rate +9.4% (blue), 6-month moving average annualized rate +2.1% (red).
A huge collection of other services on which people spend large sums of money, such as broadband, mobile phones, and other communications. delivery; home maintenance and repair; Moving and storage. Overall education and training. professional services such as legal, accounting, and tax services; Union dues, professional association dues. Funeral and burial services. personal care and clothing services;Social services such as nursing homes and rehabilitation services
And the core PCE price index is…
As a result, the core PCE price index, which includes core services and non-energy goods, accelerated month on month to an annualized rate of 5.1%, its worst level in 12 months (blue). The six-month moving average accelerated to 2.5% annually (red).
Last time’s head fake.
Inflation in core services is difficult to overcome and can lead to large-scale head fakes. This is a fact that Chairman Powell has mentioned several times, so the Fed is taking a wait-and-see attitude.
The last time we had this kind of core services inflation (in the 1970s and 1980s), there were clear signs that inflation was cooling rapidly, as the high interest rates at the time pushed it back down. , I repeatedly wondered if the Fed had suppressed inflation. I was relieved, but then it turned out that I had been fooled by the inflation hoax, and then the Fed raised interest rates even higher.
Head falsification occurred over a 15-year period from 1966 to 1981, when core services inflation finally reached 11%. So this is his PCE price index for “core services”. excluding energy And then there was the oil price shock.
And this is Fed Chairman Jerome Powell’s response. When we see the resurgence of inflation in core services captured by a cartoonist marco ricoli For Wolf Street:
Enjoy reading and supporting Wolf Street? You can donate. I appreciate it very much. Click on the beer and iced tea mugs to see how.
Would you like to receive email notifications when new articles are published on WOLFSTREET? Sign up here.
