PCE Price Index Update: The Core Measure Remains Well Below The Fed Tar

The August Personal Income and Outlays report for July was published Friday by the Bureau of Economic Analysis.

The latest Headline PCE price index year-over-year (YoY) rate of 1.39% is an increase from last month's adjusted 1.32%. The Core PCE index of 1.20% is fractionally lower than last month's adjusted 1.23%. With last month's release, the PCE Price Index was subjected to comprehensive revisions. The impact of the post 1985 revisions on the PCE price index has been substantial and, I would suggest, beneficial to the FOMC (see the footnote below).

As I pointed out last month, the general disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has consistently moved in the wrong direction since early 2012 and has been flatlining in recent months.

The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.

For a long-term perspective, here are the same two metrics spanning five decades.

Note: I use the data from Table 9 in the full release and tables available here.

Note on the 2013 Comprehensive Revisions
The chart below shows the size of the monthly revisions to Core PCE price index since 1985. It is calculated as the difference between the pre-and post-revision series. Specifically I subtracted the pre-revision YoY percent change from the post-revision YoY. Recessions are highlighted in gray.

One obvious result of the revisions is that they are modestly Fed friendly. They add approximately 20 basis points to recent Core PCE, which lessens the gap between the current Core PCE and the Fed's target range.

A more dramatic impact of the revisions is the much different interpretation it gives to the historical Core PCE YoY low. Before the revisions, Core PCE hit its all-time low of 1.05% in April, followed by 1.06% in May. Those two months have now been revised upward to 1.24% and 1.21%, respectively. The historic low is now pinpointed in December 2010 at 0.95%.

I'll close this brief note on the revisions with an overlay of the pre- and post- Core PCE since 2009.