Inflation Is Rising Again
The acceleration of inflation since the Federal Reserve cut interest rates in September suggests that the move was a mistake.
The personal consumption expenditure (PCE) index rose 2.3 percent over the 12 months through October, the Bureau of Economic Analysis said on Wednesday, up from 2.1 percent through September. Core PCE prices, a measure that excludes food and energy, rose 2.8 percent, the biggest year-over-year increase since April.
The month-to-month inflation figures do not look alarming until they are annualized. The 0.2 percent monthly gain in headline PCE inflation annualizes to 2.9 percent, meaning that would be the rate of inflation if it continued to run at this pace for a year. That’s a big increase from the 2.1 percent one-month annualized pace recorded in September and a long way from the Fed’s two percent target.
Core PCE rose 0.3 percent compared with the month prior, which annualizes to 3.3 percent. The prior month was running at a 3.1 percent annualized pace. In other words, inflation is going the wrong way.
Core PCE excluding housing rose at a 3.0 percent annualized pace, up from 2.9 percent. Core services excluding housing, a category that Fed Chair Jerome Powell has mentioned as worth watching for signals of underlying inflationary pressures, was up an annualized 4.4 percent, a big increase from the 3.6 percent a month earlier.
The Federal Reserve Bank of Cleveland calculates median PCE inflation. This was up 0.2 percent month-t0-month and 3.1 percent compared with 12 months earlier. While the one-month rate is slightly lower than the previous month’s, the 12 month rate is exactly the same. No sign of progress to two percent here.
The Dallas Fed’s trimmed mean PCE inflation measure did improve on a one-month basis. This rose at an annualized rate of 2.3 percent, down from September’s 2.6 percent. But even after the decline, this is the highest rate since the inflation surge in the spring. On a 12-month basis, trimmed mean inflation is up 2.7 percent—exactly where it was in the previous two months.
No Sign That Monetary Policy Is Restrictive
Meanwhile, jobless claims continue to come in very low and consumer spending is still humming along. The Department of Commerce said on Wednesday that household spending was up 0.4 percent in October, and incomes were up 0.6 percent. The Fed insists that current rates are restrictive, but it looks like someone forgot to tell American consumers and employers.
Inflation is running considerably hotter than the Fed thought it would be. When the Fed cut in September, it projected that core 12-month PCE inflation would be 2.6 percent in December. Now, according to Jason Furman, it’s “very likely” that it will be three percent. The Fed’s confidence that inflation was on the way down to two percent looks misplaced.
The risks to the economy can no longer be described as balanced between a labor market downturn and an inflation increase. Inflation is the much greater threat. Unfortunately, the Fed may feel compelled to stick to its prior assessment for at least one more month and cut again in December. The market currently assigns around a 70 percent chance of another cut this year.
But after that, the Fed is likely to go into a long hold as it assesses the new fiscal and economic picture emerging with the arrival of the Trump presidency. There is a nontrivial chance that the Fed eventually finds itself in the awkward position of having to raise rates again next year.
The Fed could have simply waited in September and let the economic data guide policy. Instead, it jumped the gun. And now we are living with the consequences.
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