August 31, 2006
Still Not As Good As It Looks
Once again, I find myself not so convinced by what at first appears to be good news on the inflation front. From Reuters:
In another sign of moderating inflation, the government reported earlier Thursday a smaller-than-expected 0.1 percent July rise in the core personal consumption expenditure index, the Federal Reserve's preferred inflation gauge. The core PCE advanced 0.2 percent in June.
That core personal consumption expenditure index, of course, is the PCE exlcuding food and energy components. But the Dallas Fed provides an alternative look, that is not so wonderful:
The trimmed mean PCE inflation rate for July was an annualized 3.1 percent. According to the BEA, the overall PCE inflation rate for July was 4.1 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.7 percent.
That 3.1 percent represents a slight increase over the 3.0 percent annualized increase in June. I can really do no better than repeat what I said in my post about about the Consumer Price Index inflation report a few weeks ago: Unlike the traditional core inflation measure, which simply excludes food and energy components, the trimmed-mean measures excludes both high and low price changes, no matter what they might be. The idea is to get a picture that is not distorted by items with prices that are increasing by a lot, or decreasing by a lot. And that picture just isn't improving that much:
Almost 60 percent of expenditure-weighted price increases -- 59.16 percent to be exact -- were over 3 percent annualized in July. That is a slight deterioration relative to the year for a whole -- the corresponding figure for the first 7 months of 2006 is about 52 percent -- but, more importantly, the shift in the distribution is clearly toward higher rates of increase.
I'm not surrendering, but it is clearly too early to declare victory on the basis of a good PCE ex food and energy signal, even adjusting for the usual caveat to not get overly exxcited about one month's data.
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