Expect favorable CPI and PCE inflation reports for another two months – MishTalk

The BLS released consumer price index numbers for July. The PCE, the Fed's preferred inflation measure, won't be released until August 30. Here are my forecasts through September.

Diagram Notes

• CPI is the Consumer Price Index. The monthly reports come from the Bureau of Labor Statistics (BLS), the same organization that publishes the monthly labor market reports.
• PCE is personal consumption expenditure Price index not to be confused with PCE expenditures. The latter are expressed in dollars. PCE reports come from the Bureau of Economic Analysis (BEA), the same organization that publishes the quarterly GDP reports.

CPI measurements

The Consumer Price Index (CPI) measures the prices of items paid directly by consumersShelter has the largest weighting of the total index at 36.315 percent.

The Consumer Price Index (CPI) does not include housing prices, only rents and equivalent rent (OER). OER is the price a homeowner would pay if they rented rather than owned.

PCE measurements

The PCE includes items paid directly by consumers, but also expenditures made on behalf of consumers. Medical care is the best example. The PCE measures the prices of individual policies as well as company-based health insurance and Medicare.

Consumer Price Index (CPI) compared to PCE

Neither measures housing prices directly. Both measures are flawed. Inflation is important, not just consumer inflation. The Fed doesn't understand that.

Due to the different units of measurement and weightings, rent has a greater impact on the Consumer Price Index (CPI) than the PCE, and the PCE outweighs health care compared to the Consumer Price Index.

The most important factor in estimating year-on-year change is what happened to the month-on-month change a year ago.

Investopedia notes: “Previous PCE numbers are revised every year. This can lead to different measurements over longer periods of time. Some observers believe this reflects an inability to accurately assess personal consumption expenditures.”

Monthly change one year ago

• CPI July: 0.2 percent
• CPI August: 0.5 percent
• CPI September: 0.4 percent
• PCE July: 0.1 percent
• PCE August: 0.4 percent
• PCE September: 0.4 percent

The numbers for August and September are hard to beat. If the CPI and PCE numbers are better than a year ago, the year-on-year numbers are declining.

July is a tough number to beat for the PCE (0.1), but I still predicted a year-over-year decline. To understand why, let's look at the latest CPI report.

Consumer price index slightly better than expected year-on-year

On August 14, I commented Consumer price index slightly better than expected year-on-year

Shelter was hot

The largest component of the CPI is the Owners' Equivalent Rent (OER), which has a weight of 26.76 percent. The OER is the price that homeowners would pay to rent their home if they were renting it rather than owning it.

Rent for the main residence amounts to a further 7.64 percent and the broader category “accommodation” accounts for a whopping 36.32 percent of the consumer price index.

Housing and OER prices rose by 0.4 percent. However, the Consumer Price Index (CPI) only rose by 0.2 percent.

Good news from the medical field

Medical care services, which account for 6.51 percent of the consumer price index, fell by 0.3 percent in July.

Medical supplies, with a CPI weight of 1.48 percent, rose 0.2 percent.

Given that the PCE overvalues ​​healthcare and undervalues ​​rents relative to the Consumer Price Index (CPI), I expect a slight improvement in the PCE price index year-over-year, despite the difficult year-over-year comparison.

On August 13, I commented Expect good to very good CPI reports for July, August and September

I estimated a year-on-year decline of 0.1 to 2.9 percent, and that is what happened despite the hot shelter components.

Today I forecast the PCE and CPI through September.

Due to the strong development of the housing component, I have raised my CPI forecast figures for August and September by 0.1 percentage points.

Be careful with Treasury shorts

The simple year-on-year comparison will allow the Fed to cut interest rates faster than many think necessary.

And if rents rise by 0.2 percent or less month-over-month, the year-over-year consumer price index could fall slightly below 2.0 percent in the September report (which was released in October).

I would not recommend short selling long-term US government bonds here.

Recession underway

I think we are in a recession and it will get worse. Politically speaking, recessions always hurt the incumbent party.

July 25, 2024: All hell will break loose in the next few months as the recession hits

2 August: Unemployment rate rises, number of jobs increases by only 114,000, further negative revisions

2 August 2024: The McKelvey (Sahm) rule on the recession of the unemployment rate has just come into force

15 August 2024: Industrial production falls by 0.6 percent due to strong negative revisions