Inflationary Outlook: The Federal Reserve’s Favored Measure of the November Outage and a Monitor of Its Implications for the Services Sector
The Federal Reserve has a preferred measure of inflation, and it showed in November that the period of high prices has ended.
The Commerce Department reported that the PCE rose in November from a year earlier. In October, prices rose 5.6% annually.
The annual increases for both PCE inflation indexes fell to their lowest level in over a year, as other inflationgauges declined.
Friday’s report was the first to show that spending continued to rise but at a slower rate than in the previous months. In the month of November, spending increased by 0.8% compared to the previous month. Personal income increased by 0.4% in November, down from 0.7% in October.
The Fed reported last week that their board members thought inflation would stay higher for longer than they had previously thought. Fed board members now expect PCE inflation to end 2023 at 3.1% and core PCE to finish next year at 3.5%, above the central bank’s target rate of 2%.
The central bank raised its benchmark interest rate in seven of it’s meetings in March. The sharp hike in rates has started to filter through the economy, its effects showing up first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac data.
“The economy is moving in the right direction from the Federal Reserve’s perspective at the end of 2022, but not quickly enough,” Gus Faucher, chief economist for PNC Financial Services, said in a statement. Consumer spending is being affected by higher interest rates and inflation is slowing.
However, inflation within the services sector has been a little “sticky,” and not abating as quickly. The services index increased by 0.4% in November, unchanged from October, and is up more than 11% over the same time last year, Faucher noted.
While much of the services inflation is due to housing costs, which are rapidly reversing, the Fed is concerned that strong wage growth could fuel persistent increases in services prices and overall inflation, he added.
He added that the Federal Open Market Committee will keep raising the fed funds rate until there is more evidence that the job market is cooling and wage growth is slowing to more sustainable paces.
December Manufacturing Demand Rises, and the U.S. Consumer Confidence Index is Up 0.1 Percent Point to 0.5 Percent
A Commerce Department report shows that new orders for manufactured goods went down in November, the biggest monthly decline since the start of the Pandemic.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. New orders increase by 2% without transportation.
Diane Swonk, chief economist for KPMG, said on Friday that core durable goods orders hadn’t fallen but slowed, reflecting growing unease about the economy. The prelim reading for December shows that manufacturing will contract further in the year end. A cold winter is expected for the manufacturing sector.
“Consumers clearly welcomed the recent easing of inflation,” Joanne Hsu, director of the Surveys of Consumers, said in a statement. “While sentiment appears to have turned a corner from its all-time low from June, consumers have reserved judgment about whether the trends will continue.”
The final December reading of the consumer sentiment came in at 59.7, up from a preliminary reading of 59.1 and the final reading of 58.6 in November.
Earlier this week, the Conference Board’s consumer confidence index – another measure of how consumers are feeling about the economy – landed at its highest measurement since April 2022.
The newly calibrated Consumer Price Index shows that prices rose 0.1% on a seasonally adjusted basis in December from November versus a previously estimated decline of 0.1%.
“Whether you’re talking about inflation, labor markets, GDP, these things all go through seasonal adjustment procedures and do get revised over time,” said Andrew Patterson, senior economist in Vanguard’s investment strategy group.
The change in the inflation trend is slight, with November and October revised up by 0.1 percentage points.
Core CPI, which excludes the more volatile categories of food and energy, saw upward revisions of 0.1 percentage points in December and November to 0.4% and 0.3%, respectively.
How Recent CPI Data Can Help Us Track the Growth of the U.S. Economy, And Its Implications for Forecasting Future Trends
“There’s not usually a whole lot of focus on it, but given the magnitude of inflation and the volatility of macro fundamentals these days, it’s probably gotten a little bit more attention than typical,” he added.
The latest BLS changes made it clear that not reading into a single data point is important and that the process of reviewing many different metrics is more important than just reading one data point at a time.
The January consumer price index report is days before the release of the annual revisions and it will debut some changes of its own: changing its weighting methodology from consumption patterns to a single year of spending data.
“This means that this 2023 CPI report will be based on consumer spending patterns that took place in 2021, as opposed to 2022’s CPI data, which was based on spending data over 2019-2020,” William Blair analyst Richard de Chazal wrote in a note Friday. “From the BLS’s perspective, this makes the data more timely and relevant, and a better reflection of actual spending patterns.”
The adjustments could help better gauge economic activity during what’s been a very unpredictable time, noted Diane Swonk, KPMG chief economist, in a Twitter thread this week.
A surge in extreme weather events and the economy’s emerging from a Pandemic have distorted normal seasonal patterns in the US.
Tracking current economic conditions has been made more difficult due to the fast pace of the economy’s shift. It is hard to tell where we are, let alone where the economy is headed,” she said.