uploads/2015/12/SEP-Range1.jpg

Personal Consumption Expenditures Inflation May Continue to Fall

By

Updated

Summary of economic projections

The FOMC (Federal Open Market Committee) releases an SEP (Summary of Economic Projections) in four of its scheduled eight meetings in a year. In it, FOMC members present their projections on three variables:

  • Economic growth
  • Unemployment rate
  • PCE (personal consumption expenditures) inflation

The SEP presents both the range of the projections, meaning the lowest to highest figures projected for an indicator, and also the central tendency of the projections, which excludes the three highest and the three lowest projections for the variables. From September 2015 onward, the Federal Reserve began adding the median values of their projections as well.

Let’s look at PCE inflation expectations first.

Article continues below advertisement

PCE inflation

The range of FOMC participants’ PCE inflation projections for 2015 stands reduced from 0.3%–1.0% in September to 0.3%–0.5% in December. Meanwhile, both the central tendency and median for PCE inflation for 2015 stand at 0.4%.

OPEC’s (Organization of the Petroleum Exporting Countries) decision to not cut production has hurt crude oil prices in recent times. Mutual funds such as the ClearBridge Aggressive Growth Fund Class A (SHRAX) and the Fidelity Blue Chip Growth Fund (FBGRX), which have close to a fifth of their assets invested in the energy sector, need to be careful about this development.

The fall in energy prices is expected to impact inflation more sharply in 2016 than has previously been estimated. September’s central tendency for PCE inflation ranged between 1.5% and 1.8%. This has been reduced to 1.2%–1.7% in the December projections. Post-2016, policymakers expect PCE inflation to reach close to the 2% level.

A fall in crude oil prices pushed gasoline prices down and hurt marketers and retailers such as Marathon Petroleum (MPC), Valero Energy (VLO) and Alon USA Energy (ALJ).

Core PCE inflation

The central tendency of projections for core PCE inflation for 2015–2018 were nearly unchanged from those made in September. However, the medians for 2015 and 2016 were reduced slightly, showing that the impact of a fall in import prices is expected to be felt until the end of next year.

In the next article, let’s look at projections for two other variables: economic growth and unemployment rate.

Advertisement

More From Market Realist