une 28, 2019

There are many different measures of inflation, but the one that the Federal Reserve considers to be most important is the personal consumption expenditures deflator, in particular the PCE deflator excluding the volatile food and energy components.

The PCE deflator rose 0.2% in May, 0.3% in April,and 0.2% in March.  The year-over-year increase now stands at 1.5% although in the past four months it has risen at a 2.8% pace.

Excluding the volatile food and energy components the PCE deflator rose 0.2% in both April and May after having risen 0.1% in March.  The year-over-year increase is now 1.6% but in the past three months it has risen at a 2.0% pace.  This is the inflation measure that the Fed would like to see rise by 2.0%.   We think it will rise 1.9% in 2019 after having risen 2.0% in 2018.  This inflation gauge was approaching the Fed’s inflation target last year but has slipped a bit lately.  However, the newly imposed tariffs on imports of goods from China should  boost this index somewhat in the second half of this year so that the year-over-year increase for 2019 should be 1.9% which is close to the Fed’s 2.0% target.

The more widely known inflation measure, the CPI ex food and energy, has been rising at a somewhat faster pace and is projected to increase 2.4% overall in 2019 with a  2.2% increase for the core rate (excluding the volatile food and energy components).  For details of this forecast see the CPI write-up.

Why the difference?  The CPI measures price changes in a fixed basket of goods each month.  The deflator captures price changes, but also changes in consumer spending habits.  If we try to save money by switching from butter to lower-priced margarine, from beef to chicken, or if builders substitute PVC pipe for more expensive copper,  the deflator would come in lower than the CPI in that particular month.  For our money, we think that the CPI which strictly measures price changes is a better barometer of inflation.  The Fed disagrees.

Stephen Slifer


Charleston, SC