There are two common measures of inflation in the US. One is the CPI (consumer price index) released by the U.S. Bureau of Labor Statistics. The other is PCE (personal consumption expenditure)—a measure issued by the BEA (U.S. Bureau of Economic Analysis). The Fed states its objective in terms of PCE. The current target is 2%.
Fed is off its PCE target
The PCE price index rose by just 0.1% in April—compared to a 0.3% pace in March. It was the slowest gain since October 2009. The PCE price index inflation barely crawled up because the index for energy goods and services fell to a 20% pace—compared to a fall of 18.5% in March.
The core PCE price index excludes food and energy. It slowed down to a 1.2% pace in April from a year ago—compared to a 1.3% pace in March.
The above chart shows how far policymakers are from their goal. It’s important to note that it’s the PCE inflation and not the core PCE inflation that needs to trend towards 2%.
Any increase in this index means that the Fed is getting closer to an interest rate hike. Until the Fed progresses significantly towards this goal, it’s expected to let the inflation rate run.
This will support gold prices (GLD) (IAU) and gold stocks including Goldcorp (GG), Kinross Gold (KGC), Hecla Mining (HL), and Silver Wheaton (SLW). It will also support ETFs like the VanEck Vectors Gold Miners ETF (GDX) that invest in these gold stocks. Goldcorp and Kinross Gold form 10.6% of GDX’s holdings.
In the next few parts of this series, we’ll discuss the second part of the Fed’s mandate, maximum employment, and how it’s progressing compared to the Fed’s goal.