How Does Personal Spending Impact Inflation?
The PCE (personal consumption expenditures) price index is one of the Federal Reserve’s preferred metrics to gauge inflation. In September, the PCE price index increased 0.3% from the previous month or 6.2% over the past 12 months, the Bureau of Economic Analysis (BEA) said in an Oct. 28 release.
The PCE price index is a measure of the prices that people living in the U.S., or those buying on their behalf, pay for goods and services. It is used for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior, the BEA explains on its website.
In addition, the core PCE index, excluding food and energy, increased 0.5% from the previous month or 5.1% over the past 12 months. As for the PCE — what households spend on goods and services — it rose 0.6% in September which was more than expected, as economists polled by Reuters had forecast consumer spending would gain 0.4%.
But what’s the data’s correlation to inflation and how does it impact it? Basically, as long as consumers keep buying, inflation will remain hot.
“To slow inflation, it’s best to see lower consumer spending. Consumer spending and inflation have a chicken and egg relationship,” Rusty Vanneman, chief investment strategist at Orion Advisor Solutions, said.
“All else being equal, strong consumer demand creates inflation as consumers will pay up for products. In turn, higher inflation creates higher inflation expectations which in turn spurs more consumer spending. If you need to buy something, and prices are going higher, you need to buy sooner than later!”
Benjamin Harris, Assistant Secretary for Economy Policy, for the Treasury Borrowing Advisory Committee, reiterated that the Fed’s preferred measure of inflation is the PCE price index, with a target rate of 2%, according to an Oct. 31 press release. Harris added that the PCE price index typically has slower growth than the CPI as it assigns different weights for different components than does the CPI and uses a different methodology in its calculation, but the drivers of both measures remain similar.
As Bloomberg reported, similar to the consumer price index [CPI] data out earlier this month, the latest figures underscore the severity and breadth of U.S. inflation.
Commenting on the PCE data, Jeffrey Roach, Chief Economist for LPL Financial, said that “the Federal Reserve has not yet broken the persistent trend in core inflation. However, some areas of the economy show significant weakness and could build the case that the Fed downshifts to smaller rate hikes in 2023.”
Indeed, Fed Chair Jerome Powell said at its Nov. 2 press conference that “inflation remains well above our longer-run goal of 2%, citing the PCE data, saying that “the recent inflation data again have come in higher than expected.”
“Here in the United States, we have a strong economy and we have an economy where inflation is running at 5%. Core PCE inflation, which is a really good indicator of what’s going on for us, is — the way we see it — is running at 5.1% on a 12-month basis, and sort of similar to that on a three-, six- and nine-month basis. So we know that we need to use our tools to get inflation under control,” he said, according to a transcript of his remarks.
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