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Could Personal Consumption Expenditures Growth Affect Rate Hikes?

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Jan. 31 2018, Updated 9:35 a.m. ET

Personal consumption expenditures

Personal consumption expenditures (or PCE), as defined by the Bureau of Economic Analysis (or BEA), is the value of the goods and services purchased by, or on the behalf of, people who reside in the United States. The US Fed considers the PCE inflation rate when making monetary policy decisions, as the PCE inflation (CPI) reflects the actual increase in prices for consumers.

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PCE December reading

PCE increased 0.1% in December and 1.7% in 2017. Core PCE prices, which exclude the volatile food and energy (USO) prices, have increased 1.5% in 2017. Personal spending has increased 0.4% in December, while the annual figure stood at 4.6%. Steadily rising incomes led to increased spending by consumers, which has also resulted in increasing consumer debt. However, the overall debt levels in the economy are still at an acceptable level near 10% as compared to the pre-recession level of over 13%.

Is a 1.5% increase in PCE good enough for the Fed?

The annual increase in PCE inflation of 1.7% in 2017 is marginally below the Fed’s 2% target. In many of the recent FOMC meeting statements, the Fed has maintained that the inflation (TIP) growth is on track to reach the 2% goal and continued to signal future rate hikes. Even though the current pace of inflation (VTIP) growth remains below the target level, the pace of inflation growth in recent months should make the Fed confident about increasing interest rates (BND). There aren’t any rate hikes expected at the January meeting, but the next meeting in March could end with the first rate hike of 2018.

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