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By Wolf Richter for WOLF STREET.
The Fed’s primary yardstick for its 2% inflation target, the “core” PCE price index, which excludes the volatile components of food and energy, rose by 1.0% annualized in May from April (not annualized, +0.08%), thereby below the Fed’s target, according to the Bureau of Economic Analysis today.
This was driven primarily by a plunge in the index for durable goods (-9.1% annualized, the biggest month-to-month plunge in over 23 years), and secondarily by a relatively small rise in the index for “core services” (+2.1% annualized; housing inflation and healthcare inflation accelerated, but some of the other super-volatile services components fell hard).
The six-month annualized core PCE price index, which irons out most of the monthly squiggles, and which Powell cites a lot, rose by 3.2%, same as in April. Both were the worst increases since July last year (red).
In summary, year-over-year:
Overall PCE price index, which includes food and energy was unchanged in May from April, and rose by 2.6% year-over-year, a deceleration from the prior two months, but higher than in January and February (blue in the chart below).
Core PCE price index rose by 2.6% year-over-year, continuing the deceleration (red). The Fed’s target for this metric is 2% (purple).
“Core services” PCE price index rose by 3.9% in May, down just a hair from the prior months. It has been in that 4.0% proximity since December (yellow).
Durable goods PCE price index fell by 3.2% year-over-year, the biggest drop since 2004 (green):
Durable goods deflated, after the huge spike. The PCE price index for durable goods fell by 9.1% annualized in May from April, the biggest drop since September (blue). Durable goods include motor vehicles, recreational goods and vehicles, appliances, electronics, furniture, etc.
The six-month index fell by 2.0%, the biggest drop since January (red). It tends to run in the slightly negative range during normal times amid manufacturing efficiencies and globalization.
“Core Services” PCE price index, which excludes energy services, rose by 2.1% annualized in May from April, the smallest increase since August 2023 (blue in the chart below).
The six-month core services PCE index jumped by 4.4% annualized, right in the middle of the range of the prior four months (4.3% to 4.5%) and above the range in the second half last year.
Core services is where inflation has gotten entrenched, and it’s where the majority of consumer spending goes. It includes housing, healthcare, insurance, transportation services, communication services, entertainment, etc., with charts further below.
Fed speakers constantly point at the way-too-high core services inflation; and they have been hoping and predicting that housing would cool dramatically, and it did for a while, and then it didn’t. Since August last year, the month-to-month PCE price index for housing inflation has hovered in the 5.0% to 6.0% range.
The core services categories.
Housing PCE price index accelerated to 5.2% annualized in May from April, and was above where it had already been in December and August last year.
The six-month index jumped by 5.4% annualized, a slight deceleration from the prior month. It really hasn’t significantly changed since November and remains high.
The housing index is broad-based and includes factors for rent in tenant-occupied dwellings, imputed rent for owner-occupied housing, group housing, and rental value of farm dwellings.
The remaining core services components are super-volatile, with massive spikes and drops month-to-month that often shoot through or plunge off the charts. Clearly, with this kind of volatile month-to-month data, one month doesn’t make a trend. In fact, they’re so volatile month-to-month that even the six-month readings have big squiggles. Anyway, for your amusement:
Financial services & insurance:
Month-to-month annualized: -3.9%
Six-month annualized: +8.1%
Year-over-year: +5.4%
Healthcare PCE Price Index:
Month-to-month annualized: +8.8%
Six-month annualized: +3.8%
Year-over-year: +3.1%
Other core services PCE price index (Broadband, cellphone, other communications; delivery; household maintenance and repair; moving and storage; education and training; legal, accounting, and tax services; dues; funeral and burial services; personal care and clothing services; social services such as homes for the elderly and rehab services, etc.):
Month-to-month annualized: -2.7%
Six-month annualized: +4.1%
Year-over-year: +2.4%
Transportation services PCE price index (motor-vehicle maintenance and repair, car rentals, parking fees, tolls, airline fares, etc.):
Month-to-month annualized: -7.5%
Six-month annualized: -0.4%
Year-over-year: +2.4%
Recreation services PCE price index (cable, satellite TV & radio, streaming, concerts, sports, movies, gambling, vet services, package tours, maintenance and repair of recreational vehicles, etc.):
Month-to-month annualized: -4.0%
Six-month annualized: +3.2%
Year-over-year: +4.0%
Food services & accommodation PCE price index (restaurants, hotels, motels, vacation rentals, cafeterias, cafes, delis, etc.):
Month-to-month annualized: +2.8%
Six-month annualized: +3.5%
Year-over-year: +2.9%
Non-energy utilities PCE price index (sewer, water supply and sanitation, trash collection):
Month-to-month annualized: +1.0%
Six-month annualized: +5.0%
Year-over-year: +4.7%
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The post Fed’s Wait-and-See on Rate Cuts Makes Sense amid Whiplash Data: Still Worst 6-Month “Core” PCE Inflation since mid-2023 but Freak Plunge in Durable Goods appeared first on Energy News Beat.
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