US PCE inflation for March 2024 at 2.7%

30 Apr 2024 , 09:45 AM

PCE INFLATION SPIKE INDICATIONS WERE VISIBLE IN GDP DATA

There was not much of a surprise in the fact that PCE inflation came in 20 bps higher at 2.7% for March 2024. The first indications were already out when the first advance estimates of Q1 GDP were published by the US Bureau of Economics (BEA) on Thursday. The report had clearly mentioned that the perceptible slowdown in real GDP growth was largely on account of higher inflation effect. Let us look at the numbers. For Q1FY24, the nominal GDP growth at 4.9% was lower than the Q4FY23 nominal GDP growth at 5.3%. However, between Q4FY23 and Q1FY24, the headline quarterly PCE inflation spiked from 1.9% to 3.1%.

This resulted in a sharp fall in the real GDP growth in Q1FY24 to 1.6%, compared to 3.4% in Q4FY23. Interestingly, most of the pressure on inflation in the first quarter of 2024 came from core inflation. As per the BEA report, the core PCE inflation (net of food and fuel) spiked by 170 bps between Q4FY23 and Q1FY24 to 3.7%. This was one of the primary factors that drove the PCE inflation for Q1FY24 higher. With that broad picture, it was only logical that PCE inflation for March 2024 would show a rising trend. And that is exactly what we saw as PCE inflation in March 2024 spiked by 20 bps from 2.5% to 2.7% over February.

WHAT SPURRED PCE INFLATION TO 2.7% IN MARCH 2024?

In February 2024, the PCE inflation had spiked by 10 bps from 2.4% to 2.5%. In March 2024, the PCE inflation spiked another 20 bps from 2.5% to 2.7%. The early indications were there in the US consumer inflation, which is announced by the Bureau of Labor Statistics (BLS) in the middle of each month. The PCE inflation normally tends to follow the consumer inflation with a lag. Also, this time around the sharp fall in real GDP reported a day earlier, was also indicative of the fact that inflation had spiked in March. So, what exactly triggered the PCE inflation to spike by 20 bps from 2.5% in February to 2.7% in March 202r4.

Let us stat with the PCE food inflation for March 2024. In March 2024, the PCE food inflation spiked by 20 bps from 1.3% to 1.5% over the previous month. This is the first time in the last 8 months that PCE food inflation reversed its falling trend. Let us now turn to energy inflation. After being in the negative zone for 6 out of the last 7 months, PCE energy inflation bounced back to 2.3% in March 2024. Between February and March, the PCE energy inflation spiked by 490 basis points, largely as an outcome of the headwinds posed by the Red Sea crisis and the worsening geopolitical situation in West Asia. PCE core inflation (excluding food and energy) remained flat at 2.8% in March 2024, the first time PCE core inflation reversed its falling trend in the last 8 months.

WHAT TRIGGERED THE PRESSURE ON PCE CORE INFLATION

PCE inflation is still distinctively lower from a longer term perspective. However, the concern is that the falling trend has now been reversed and even the quarterly PCE core inflation data appears to validate that assumption. Between July 2023 and March 2024; the headline PCE inflation fell 60 bps from 3.3% to 2.7%, while core PCE inflation fell by 140 bps from 4.2% to 2.8%.

Month	Headline PCE Inflation	Core PCE Inflation
July 2023	3.3%	4.2%
August 2023	3.3%	3.7%
September 2023	3.4%	3.6%
October 2023	2.9%	3.4%
November  2023	2.7%	3.2%
December 2023	2.6%	2.9%
January 2024	2.4%	2.9%
February 2024	2.5%	2.8%
March 2024	2.7%	2.8%

Data Source: Bureau of Economic Analysis (US)

If you look at the above table, both headline PCE inflation and core PCE inflation have been progressively falling. However, that trend appears to have been arrested in the last 2 months. Even the quarterly GDP data indicate that higher core inflation is driving headline inflation higher. The reasons are not far to seek. In the last 1 year, core inflation was consistently falling as the supply chain constraints imposed by the pandemic were getting rectified. However, that is now done and the incremental benefits are limited. At the same time, the Red Sea crisis and the geopolitical situation in West Asia are imposing fresh supply chain risks for the US economy. That is leading to a spike in core PCE inflation.

PERSONAL INCOME STORY FOR MARCH 2024?

PCE inflation is relevant in 2 ways. Firstly, it is announced towards the end of the month, so it covers more data points compared to CPI inflation. Secondly, PCE inflation reflects  prices from a personal consumption expenditure (PCE) perspective, so Fed prefers PCE inflation as the benchmark for rate action. Here are some key data points to note.

• Personal income in March 2024 increased by $122.0 Billion (0.5% monthly) as per the estimates put out by the BEA.
• Disposable personal income (DPI), personal income minus personal taxes, increased $104.0 Billion (0.5%) while personal consumption expenditures (PCE) increased by $160.9 Billion (0.8%). The spike in personal consumption spending may actually dissuade the Fed from even considering rate cuts for the time being.
• The increase in current-dollar personal income in February 2024 primarily reflected increases in compensation.
• Let us turn to the positive drivers of $160.9 Billion increase in personal consumption expenditure for March 2024. There was an increase of $80.6 Billion in spending for services and an increase of $80.3 Billion spending for goods.
• Within services, the largest contributors to the spike were healthcare (both out-patient and hospitals), housing, and utilities. Within goods, the leading contributor to the increase were gasoline and other energy products, recreational non-durable goods, food products, and beverages.
• Personal saving was higher at $671.0 Billion in March 2024 and the ratio of personal savings to disposable personal income fell by 40 bps to 3.2%.

BREAK-UP OF US PCE INFLATION (YOY) FOR MARCH 2024

The US Bureau of Economic Analysis (BEA) publishes the PCE inflation on a yoy basis and on MOM basis. Let us first look at the PCE inflation on a yoy basis with granular break-up.

Break-up of PCE Inflation (YOY)	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24	Mar-24
Headline PCE Inflation (Year on Year)	3.3	3.4	2.9	2.7	2.6	2.5	2.5	2.7
Goods	0.7	0.9	0.2	-0.1	0.2	-0.5	-0.2	0.1
Durable goods	-1.9	-2.3	-2.2	-2.1	-2.3	-2.4	-2.0	-1.9
Nondurable goods	2.1	2.7	1.6	1.0	1.6	0.5	0.8	1.3
Services	4.7	4.6	4.3	4.1	3.9	4.0	3.9	4.0
Addenda:
Core PCE excluding food and energy	3.7	3.6	3.4	3.2	2.9	2.9	2.8	2.8
Food	3.1	2.7	2.4	1.7	1.4	1.4	1.3	1.5
Energy goods and services	-3.5	0.1	-4.6	-5.0	-1.7	-4.9	-2.3	2.6

Data Source: US Bureau of Economic Analysis (BEA)

The above table classifies yoy PCE inflation into goods and services inflation; and also classifies it into food, energy, and core inflation. Here are major takeaways.

• Headline PCE inflation has shown a secular downward trend since April 2023 and has fallen 170 bps till March 2024. Since September 2023, headline PCE is down 70 bps.
• PCE inflation for goods hardened from -0.2% to 0.1%, but it is the break-up of the goods inflation that is more interesting.
• Within goods, the durable goods stayed in negative but saw hardening of inflation levels from -2.0% to -1.9% while the inflation in non-durable goods also hardened from 0.8% to 1.3%. The hardening durable and non-durable inflation was sharp in last 2 months.
• For March 2024, the services inflation edged up 10 bps from 3.9% to 4.0%. Incidentally, the services inflation is down a full 160 bps from a high of 5.6% in April 2023.
• Core PCE inflation yoy has shown a consistent downtrend since June 2023; falling 160 bps from 4.3% to 2.7% in Mar-24 the Middle East and West Asia imposed supply chain constraints, even as the post-pandemic tapering of supply chain constraints saturated.
• On a yoy basis, PCE food inflation is 20 bps higher at 1.5%, but is sharply down by 320 basis points from a level of 4.7% in June 2023.
• Energy inflation hardened sharply in March 2024 from -2.3% to +2.6% as the prices of gasoline and fuel increased sharply in line with the rising Brent Crude prices. Overall, the PCE inflation saw pressure across food, fuel, and core baskets in March 2024.

Fow now, the biggest risk is that the worsening geopolitics in the Middle East and West Asia is likely to seep into higher core inflation in the US economy.

BREAK-UP OF US PCE INFLATION (MOM) FOR MARCH 2024

The table below captures the high frequency month-on-month (MOM) inflation published by the US Bureau of Economic Analysis (BEA), capturing short term trends.

Break-up of PCE Inflation (MOM)	Aug-23	Sep-23	Oct-23	Nov-23	Dec-23	Jan-24	Feb-24	Mar-24
Headline PCE Inflation (MOM)	0.4	0.4	0.0	0.0	0.1	0.4	0.3	0.3
Goods	0.8	0.2	-0.3	-0.6	-0.2	-0.2	0.5	0.1
Durable goods	-0.3	-0.1	-0.2	-0.5	-0.5	0.2	0.2	0.1
Nondurable goods	1.4	0.3	-0.3	-0.6	-0.1	-0.4	0.7	0.2
Services	0.1	0.5	0.2	0.3	0.3	0.7	0.3	0.4
Addenda:
Core PCE ex-(food and energy)	0.1	0.3	0.1	0.1	0.2	0.5	0.3	0.3
Food	0.3	0.3	0.2	-0.1	0.0	0.5	0.1	0.0
Energy goods and services	6.1	1.7	-2.5	-1.9	-0.3	-1.4	2.3	1.2

Data Source: US Bureau of Economic Analysis (BEA)

Like the YOY inflation, even the MOM PCE inflation data is classified into goods and services inflation as well as food, fuel, and core inflation. Here are some key takeaways.

• After being on a rising trend between April and September, the MOM PCE inflation had fallen to 0.0% in October and November. In March 2024, it is flat at 0.3%.
• PCE inflation for goods fell sharply from 0.5% to 0.1% MOM for March 2024. Goods inflation for durables fell from 0.2% to 0.1%, while non-durables inflation fell sharply from 0.7% to 0.2%.
• Services inflation MOM edged higher from 0.3% in February 2024 to 0.4% in March 2024; indicating that short term pressure is still coming from services inflation.
• Core PCE inflation, on a high frequency MOM basis, is flat at 0.3% in March 2024, showing signs of supply chains easing, although West Asia continues to be a factor.
• While the food inflation on MOM basis has fallen from 0.1% to 0.0%, the energy inflation also fallen sharply from 2.3% to 1.2% in March 2024.

The big takeaways are that services inflation continues to be the key challenge. Also, the PCE inflation could now see pressure from food and core inflation, even as energy tapers.

US MARKETS SHOULD FORGET ABOUT RATE CUTS FOR NOW

In the last 6 months, we have heard diverse comments coming from the members of the Federal Open Markets Committee (FOMC) on the likely timing of rate cuts. While Powell has played a more diplomatic game, the avowed hawks like Christopher Waller and Michelle Bowman have for long been votaries of holding rates higher for a longer period of time. Recently, we have seen even pro-market voices like Neil Kashkari veering towards a more hawkish view. However, after the latest GDP data and the PCE inflation data announced for March 2024, the message is clear. “Forget about rate cuts for now.”

If one looks at the CME Fedwatch after the GDP data and the PCE inflation data, there are a few things that emerge. Firstly, markets are not entirely ruling out the chances of one more rate hike, should inflation get stickier. The CME Fedwatch appears to believe that the first rate cut by the Fed would happen in September. However, that is the only rate cut likely to happen in 2024. Even as of the December 2024, the probability that only 1 rate cut would have happened is as high as 60%. What happens in 2025, would be more of a theoretical debate today as it would be best to wait for the data flows and first deal with 2024. We would, probably, get a clarity on 2025 trajectory only by December 2024.

For the RBI, this is good news as it anyways does not intend to act till the full budget is presented in July 2024. For now, it is likely to be status quo at RBI!