The consumer price index, or CPI, shares some similarities with the PCE. Both indexes measure consumer spending and focus on how the ever-changing prices of goods and services affect households, as opposed to companies or producers. Both are commonly used to measure inflation, although economists prefer to use the PCE.
The Commerce Department on Tuesday announced that the U.S. trade deficit declined 2% in November to $63.2 billion. Exports and imports both declined by 1.9% in November to $253.7 billion and $316.7 billion, respectively. In the upcoming months, continued high energy exports are expected to shrink the U.S. trade deficit. Despite this, the market’s first rate cut isn’t expected until July 2024, reflecting the Fed’s commitment to keeping interest rates elevated for an extended period.
- The CPI is compiled monthly by the Bureau of Labor Statistics based on a survey of urban households.
- In Oslo, Norway, temperatures plunged to -20 degrees Centigrade (-4 Fahrenheit), which disrupted train schedules and caused havoc with the city’s electric bus fleet, since batteries do not like cold weather.
- In August, the annual headline CPI rate accelerated for the second consecutive month, rising from 3.2% in July to 3.7% in August.
- This was a big shock, since economists were expecting a reading of 52.6.
- In the lead-up to 2008, we saw a similar result with CPI outpacing PCE, although the volatility of fuel prices at the time somewhat obscured the effect on the aggregate indexes.
Last Thursday, the St. Nikolas was seized by armed men off the coast of Oman and is now headed to Iranian waters. The St. Nikolas had been previously commandeered by the U.S. for sanctions evasion. Obviously, this is a diplomatic incident and appears to be challenging international sanctions, so crude oil prices rose in the wake of the St. Nikolas being seized and diverted to Iranian waters. As I have said here for months, China is exporting its deflation to us, as reflected in our PPI. Deflation is unquestionably enveloping the Chinese economy, and this deflation is being exported around the world, not just to us.
The PCE data for November 2023 showed an increase in personal consumption expenditures to $18.86 trillion, which is an increase of 0.2%. BEA measures consumer spending for the nation and is broken down by state and the District of Columbia. While it issues the aforementioned monthly report, additional details are provided annually.
Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee. The Fed’s focus on “supercore” categories also zooms in on the cost of labor, so the central bank can better gauge the impact of wages on prices. In the context of the US today, supercore inflation mostly reflects the prices of services, such as those provided by lawyers, plumbers, gardeners, and hairdressers that remain stubbornly high. Because both CPI and PCE measure such a wide range of goods, the Fed and economists traditionally prefer to look at the core CPI or PCE inflation to get a better handle on price swings. This is because core CPI or core PCE excludes volatile, temporary price fluctuations in food and energy categories, and so gives a better indication of the longer-term inflation trend. Navy launched a coordinated attack of approximately 70 airstrikes on Houthi rebels in Yemen.
The US PCE inflation rate was 5.4% higher in January compared to the previous year, while core PCE was up 4.7%, according to the Bureau of Economic Analysis. The bureau doesn’t release the supercore inflation rate, but the First Trust investment management firm puts it at a 4.6% increase from a year ago. On March 7, Powell signaled the central bank is likely to hike rates higher than previously expected as there is “little sign of disinflation thus far in the category of core services excluding housing.” In both October and November, the core PCE, excluding food and energy, rose only 0.1%. The core PCE in the past 12 months rose at a 3.2% annual pace through November.
The Latest PCE Inflation Data
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment.
Since inflation is a measure of the trend in rising prices, PCE is an important metric in determining inflation. However, core PCE and CPI are similar, and both help quebex to determine how much inflation is in the economy. The above table illustrates two commonly discussed important differences between the PCE deflator and CPI-U.
It measures how consumers spend their money and whether they save rather than spend. This provides a window into demand for products and services which can help governments and businesses make decisions. Indian Rupee trades on a negative note on Monday despite the decline of the US Dollar (USD). Three union ministers said at the World Economic Forum Annual Meeting 2024 last week that the country’s economic growth now is not only high but also inclusive. They further stated that as China’s economy slows down, India’s relatively rapid growth stands out as a clear opportunity for investors in Davos looking for bright spots. However, India still faces plenty of challenges as the INR has weakened heavily, pressured by high US interest rates and volatile oil prices.
Understanding Core Inflation
Specifically, the BEA uses the Census Bureau’s annual retail trade surveys, economic censuses, quarterly services reports and monthly retail trade surveys. It also uses reports from private trade organizations and regulatory agencies. Through these reports, the BEA can estimate what goods and services were sold in a given time period.
Recent Developments and Cause of Historical Divergence
The interest rate sensitivity of the housing sector coupled with its prominence in consumer expenditures means that misjudging its relative price movements can potentially lead to policy errors. In the current environment where an expediated rise in housing prices has led to the current divergence between PCE and CPI, it is possible that the reverse trajectory may result in a similar divergence. The Federal Reserve would then have to decide whether they are seeing a clear indication of disinflation in a scenario where one index is declining at a faster rate than the other. If the Fed’s current task were compared to landing a plane on a narrow runway, this would be like adding a thin layer of fog into the equation.
In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in real terms, so the data is adjusted for price changes and is, therefore, net of inflation. Food and energy prices https://forex-review.net/ are exempt from this calculation because their prices can be too volatile or fluctuate wildly. Food and energy are staples, meaning demand for them doesn’t change much even as prices rise. For example, gas prices may rise with the price of oil, but you will still need to fill up the tank to drive your car.
Core PCE and the Federal Reserve
The Fed depends on the nuances that the PCEPI reveals because even minimal inflation can be considered an indicator of a growing economy. The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term.
Gasoline represents a larger portion of a family’s monthly budget, so it’s weighted more heavily in calculating PCE. That means rising gas prices have a bigger impact on the overall index than cheaper tomatoes. So, CPI and PCE equals the inflation of a basket of goods and services minus the food and energy inflation.
By considering the potential impact on interest rates and adjusting their trading strategies accordingly, traders can capitalize on opportunities in the forex market. An estimated total for PCE is compiled by the BEA to measure and track changes in spending on consumer goods over time. This figure can provide an idea of economic strength and how price changes can affect spending. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. So now, the Fed’s focusing on an even narrower set of prices which further strips away the housing component from the inflation rate.