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PCE Price Index: Virtually No Change in the Fed's Preferred Inflation Gauge

April 30, 2015

by Doug Short

The Personal Income and Outlays report for March was published this morning by the Bureau of Economic Analysis.

The latest Headline PCE price index year-over-year (YoY) rate is 0.33%, statistically unchanged from 0.31% the previous month. The Core PCE index (less Food and Energy) at 1.35% is only one basis point above the previous month's 1.34% YoY.

The general disinflationary trend in core PCE (the blue line in the charts below) must be perplexing to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. In April of 2013, the Core PCE dropped below 1.4% and hovered in a narrow YoY range of 1.23% to 1.35% for twelve months. The subsequent months saw a higher plateau approaching 1.5%, but the most recent months are closer to the lower range.

The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. The first string of red data points highlights the 12 consecutive months when Core PCE hovered in a narrow range around its interim low, a level to which it has returned in the last four months.

The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. Also included is an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The two percent benchmark is the Fed's conventional target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place. The most recent FOMC statement now refers only to the two percent target.

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The index data is shown to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.

For a long-term perspective, here are the same two metrics spanning five decades.

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Note: The data source is Table 9 in Excel file available in the right-hand column here.