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PCE inflation still below the Fed’s target

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CPI and PCE inflation

The two common measures of inflation in the United States are the consumer price index (or CPI) released by the Bureau of Labor Statistics and personal consumption expenditures (or PCE) issued by the Bureau of Economic Analysis. The major difference between the two measures is the composition of the basket of goods and weights. CPI usually runs half a percentage point higher than PCE inflation, and the Fed states its objective in terms of PCE.

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PCE is decelerating

PCE inflation is on a decreasing trend. It continues to run below the Fed’s longer-term objective of a core PCE of 2%. The headline PCE index year-over-year was 1.44%, unchanged from the previous month. The core PCE of 1.55% year-over-year for October was slightly up from September’s 1.49% year-over-year. Since last mid-year, core PCE has hovered in a narrow zone of 1.23% to 1.35%, apart for the last few months when the range slightly increased to 1.44% to 1.52%. Energy prices have remained a drag on the headline rate.

Any inching upward of this index means the Fed is inching closer to an interest rate hike. Of course, other factors such as labor market conditions need to be watched simultaneously.

However, as long as the Fed doesn’t reach its target of 2% core PCE inflation, it will let the inflation rate run. This will support the gold prices (GLD) and gold stocks, including Goldcorp Inc. (GG), Kinross Gold Corporation (KGC), Newmont Mining Corporation (NEM), and Barrick Gold Corporation (ABX). Exchange-traded funds (or ETFs) such as the Gold Miners Index (GDX) that invest in these gold stocks would also be supported in that case.

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