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Core PCE measure gives the Fed green light – Sober Look

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

The two major US core inflation indices have diverged. The explanation for this divergence has to do with the difference in relative importance of housing price increases in the indices.

DB: – Shelter prices have been rising at an annual rate of 2.2% in the PCE, well above the overall level of inflation measured by the index. But housing accounts for a much greater share of the core CPI index – around 42% – relative to the 15% share of the core PCE index. The weight effect of housing alone explains around 50 basis points of the annualized inflation differential between the core index, virtually the entire excess amount of observed CPI inflation. The weighting effect of housing prices in core inflation is exaggerated by factor that has little to do with housing. The relative importance of “core” components of CPI inflation has dropped by about 2 percentage points since 2010, while remaining steady in PCE inflation. This has the effect of increasing the relative importance of housing prices in core CPI.

Core CPI vs PCE compared to line fit

Given the Fed’s focus on the Core PCE measure – which is lagging – the central bank now has plenty of room to pursue its monetary expansion program. In fact if the PCE growth slows even more, some FOMC members may even push to increase securities purchases to avoid disinflation. In the mean time, liquidity driven credit markets are moving dangerously close to bubble territory.

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Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

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