PCE Price Index: Inflation Slips Further Below the Fed Target

March 2, 2015

by Doug Short

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

The latest Headline PCE price index year-over-year (YoY) rate is 0.22%, down from 0.77% the previous month. The Core PCE index (less Food and Energy) at 1.31% is little changed from the previous month's 1.34% YoY.

As I've routinely observed, 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 appear to be trending back toward the lower range.

The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I've highlighted the 12 months consecutive when Core PCE hovered in a narrow range around its interim low, a level to which it has returned in the last two months.

The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's 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.

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I've calculated the index data 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: I use the data from Table 9 in Excel file available in the right-hand column here.

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