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Amongst a bunch of economic data released last week, one data point in particular got a lot of attention. Now, the numbers everybody's been waiting for pc CORE comes in double last month at four tenths. The Personal Consumption Expenditures price Index, which is closely watched by the Federal Reserve, rose at the fastest pace in nearly a year.
The story lately has been that inflation has been decelerating relatively quickly. Now what happened in January is we got a bit of a pop in the other direction.
Today on the show, we'll talk with Matthew Bosler, a reporter and editor on the US Economy team at Bloomberg covering economic indicators and the Fed. He'll tell us what this data means and whether we should con consider this a one off aberration or a resurgence of inflation. This is the big take. I'm Sarah Holder, Matthew. We're happy to have you here with us today. Welcome to the show.
Thanks so much for having me. I always excited to talk inflation data.
So let's just start by defining our terms. What is the PCE.
So the PCE stands for personal consumption expenditures. So it's the big report that we get every month on consumer spending, and it not only includes, you know, how much of everything people are buying, but also the prices they're paying for them. And so that's why the PCE Price Index is always a big deal. At the end of each month.
We have several indicators of inflation. What makes this one unique?
Yeah, So the PCE is especially closely watched because it's the one that the Federal Reserve defines as its target, so it's targeting two percent PCE inflation, and it contrasts with the other big inflation data that we get each month, the CPI, the Consumer Price Index. Broadly speaking, the CPI tries to measure more out of pocket costs that consumers are paying for things, whereas the PCE index that the Fed targets is a little bit broader of a measure.
It contains more things like health insurance payments and financial services costs that are not necessarily being paid by consumers out of pocket but might be paid on their behalf, or might be things that they're essentially spending on in implicit ways.
So it's more granular and detailed data exactly.
It's a more comprehensive measure. That's what the Fed would say, and that's why they tend to prefer it.
So what happened with the PCE this past week?
We got the PCE inflation data for the month of January and it came in a little hot, So it was up four tenths of a percent. That was the highest monthly inflation reading actually in a full year. And so the story lately has been that inflation has been decelerating relatively quickly. If you went back six nine months, nobody was expecting inflation to come down as quickly as
it has over that time period. Now, what happened in January is we got a bit of a pop in the other direction, right, So it's kind of been disrupting that trend, and so it's opening up this interesting debate about whether this is just a one off aberration in that trend toward lower inflation that we've been seeing, or whether this might be the start of a resurgence in inflationary pressures, and whether we're not actually quite there yet
in overcoming this pandemic inflationary episode that we've seen.
So was this expected or predicted or were people kind of surprised.
It definitely came as a surprise, and there are a lot of reasons why people are skeptical of it. I think the big one, of course, is just that again, you know, we've had month after month of inflation decelerating, and that's really kind of established a trend. So you know, if we were going back, say two or three years to early twenty twenty two, and we had a very hot January inflation reading, then nobody would have thought anything of it because inflation was going up quickly each month.
But now we're in a bit of a different situation. You've got all of these other reasons to perhaps question
the validity of that data. Relating to the seasonal adjustment process around the turn of the year, going from December to January, some of the you know, particular components of the inflation index that really showed a lot of strength in January don't necessarily seem like they add up, especially when you start digging into the way rental inflation is measured in the indexes, and just given the outsize importance of that component in the inflation index, there are some
funky things in the PCE index that are not in the CPI index. One of them is basically the stock market. And so there's this component of the PCE price index called portfolio management and investment advice services, and that basically just tracks movements in the stock market up and down.
So the FED likes to say that, you know, they're not looking at stock prices, they don't care what the stock market's doing, they're not targeting the stock market, but in fact, the stock market in a very real way is kind of part of the inflation index that they
do target. And so what we've seen over the last several months is a big run up in the stock market and that's really pushed up that component of the PCE index, and that was a big part of the reason for why the January inflation number in particular was so hot. And so people are going to be looking at that and saying, should we really be putting too much way on that it's not likely to repeat? Is that something we can look through? Is that really going
to matter two months from now? Probably not, And so I think that's going to be part of the debate versus you know, other people might say, well, even if it is the stock market that's pushing it up, it's still part of the index, so we still need to kind of be consistent.
After the break. The Federal Reserve's next meeting is in March. We'll talk to Matthew about how this latest inflation report might impact what happens there. Welcome back to the Big Take from Bloomberg News. We're talking today with Bloomberg's Matthew Bosler about the latest PCE inflation data. This PCE report is the last the Fed will get before their next meeting in March, so I asked Matthew, how will it impact what happens there.
So the big question right now is whether the Fed is going to wait until this summer to start cutting interest rates, or if there's a possibility that they could start cutting interest rates as soon as May. And before the latest inflation data, May was looking more likely, and in fact, that's kind of what investors were expecting to be the likely start date. And the result of this hot inflation data that we got this past month was
to basically push that out one more meeting. And so the idea is that you know whether or not you believe this inflation data that we got is representative of the actual underlying trend. It just prolongs the uncertainty as to where inflation is going and when it will go there.
And so this meeting in March is probably going to be a lot of you know, debating what we're actually seeing in the underlying inflation numbers as opposed to necessarily getting ready to start cutting interest rates as soon as the next meeting.
Right, So, if the inflation data we saw this past month had been a little less hot, maybe we would have said seen some movement in March, but given these latest reports, that's probably not going to happen.
That's exactly right. And again that was kind of the baseline expectation in markets before we got this inflation data, and now it's just been pushed back a little bit.
So the Fed has this dual mandate. Right on one side, they want to keep prices stable, but they're also charged with trying to attain what's called maximum employment. What are they watching when it comes to employment and jobs numbers that we're seeing.
Yeah, so they're very focused on a lot of those headline numbers that we get in the monthly jobs are port probably most notably the unemployment rate. Right. Unemployment was
at three point seven percent last month. It hasn't really gone up at all since the FED started really aggressively raising interest rates at the beginning of twenty twenty two, so almost two years ago now, and so the FED is kind of looking at that and saying, well, we're not seeing any sort of softening in the labor market from these high interest rates, and so maybe that means we have more time to make sure inflation is really coming down before we start cutting interest rates, because it
doesn't really look like that other side of our mandate, that full employment side of the mandate that you're talking about, is really a big risk right now. And so that kind of is an outline of the FEDS thinking and why they're doing what they're doing, why they're dragging their feet a little bit to cut interest rates even though again inflation has been coming down really quickly over the last say, six or nine months. January numbers notwithstanding.
But the PCE is just one number that came out in the past week. We saw a bunch of other economic data released, consumer confidence, new home sales, manufacturing data. What other indicators have caught your eye this month?
Yeah, so I think all of those are really important. I think the housing stuff is interesting because it is the most directly affected by interest rates, right, And what we've seen in the broader economy is that a lot of economic activity outside of the housing market really hasn't shown much of a dent or impact from the higher rates. Housing is one where it's a very clear direct connection, and it's really been in the doldrums now for a couple years and it's not really been showing much signs
of life. On the other hand, the FED kind of sets that aside when they're looking at the economy, especially lately, because it does seem like it's kind of disconnected from broader economic dynamics, and so you know, that puts more of a premium on some of the other data you mentioned. Consumer confidence is an interesting one because it's really been rebounding the last couple months, but it kind of took a bit of a breather in January.
The consumer confidence one is super interesting, right because you know, it's down, as you mentioned, but then we have the market hitting all these record highs lately. That feels like a disconnect to me, where stocks are soaring, but regular people don't feel that great about what's happening in the economy. What's going on there well.
Interestingly, the consumer confidence index does tend to track the stock market, and so that's another reason why you might look at the latest blip in the consumer confidence numbers and say, well, can that really last or should we expect that to go higher going forward if stocks stay
this high. There are also a number of different consumer confidence indexes that we look at every month, just like there are different inflation indexes, and you know, those consumer confidence indexes tell slightly different stories, and so trying to figure out what is the true signal there is a
bit of a challenge. But generally speaking, things have finally been turning up a little bit, you know, near the end of last year, after really, you know, having seen a broader disconnect like you were talking about over the last couple years, where you know, the economy is booming, the stock market's doing well, but consumer confidence isn't as much as you would expect. And maybe one big explanation for that is the high inflation that we saw alongside
that booming stock market and rory economy. The upturn in the last few months might, for example, be an indication that inflation really is coming down in a way that regular people at their kitchen tables are actually starting.
To feel Matt, thanks so much for joining us today.
Thanks for having me.
This has been the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by Alex Uguera. It was edited by Caitlin Kenney. It was fact checked by Naomi e. It was mixed by alex Ugura. Our senior producers are Naomi Shaven and Jill Doddie Carley. We get editorial direction from Elizabeth Ponso. Nicole Beemsterbor is our executive producer. Sage Bauman is Bloomberg's head of podcasts. Thanks for listening. Please listen and review The Big Take wherever you get
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