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How February PCE Inflation Data Could Affect Fed’s Decisions

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Personal consumption expenditure

Personal consumption expenditure (or PCE), as defined by the Bureau of Economic Analysis (or BEA), is the value of goods and services purchased by, or on the behalf of, people who reside in the United States. PCE inflation (CPI) is the preferred tool of the US Fed when assessing the price levels in the economy, as it reflects the actual increase in prices for consumers. Increasing inflation (VTIP) could give the US Fed enough confidence to continue to increase the Fed funds rate.

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Personal spending levels in February

Personal consumption rose 0.2% in February and 4.6% in the last 12 months. The increase in spending coincides with the increase in personal debt, as consumer debt levels are at a record level. However, the increase in asset values somewhat balances the net debt levels. This indicates that consumer spending has more room to increase in the near term, signaling continued improvement in the economy.

PCE inflation flashes positive signs for the US Fed

Personal consumption expenditure (or PCE) inflation rose 0.2% in February and 1.8% in the last 12 months. Core PCE prices, which exclude the volatile food and energy (USO) prices, have been increasing at a higher pace of 2.8% in the last three months as compared to a 1.6% increase in 2017. This recent growth in inflation (TIP) should make it easier for the US Fed to increase interest rates to normal levels. The combination of low unemployment and inflation moving towards the 2% target should give the US Fed sufficient reason to continue its tightening path. Markets (VOO) seem to be prepared for these rate hikes as the recent hike and the updated projections did not have a major impact.

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