August 28, 2020
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 0.3% in July after rising 0.5% in June and 0.1% in May after having fallen 0.5% in April and 0.3% in March. The year-over-year increase now stands at 1.0%.
Excluding the volatile food and energy components the PCE deflator rose 0.3% in both June and July after rising by 0.2% in May after having declined 0.4% in April and 0.1% in March. The year-over-year increase is now 1.3%. This is the inflation measure that the Fed would like to see rise by 2.0%.
The world has changed in the past five months as a result of the corona virus. The global economy basically shut down in March and April and second quarter GDP declined by 31.7%. In the process of a global economic recession, commodity prices fell sharply.
But help is on the way. The government has adopted $2.5 trillion of fiscal stimulus which result in $1,200 checks being sent to virtually every taxpayer. Payroll employment, retail sales, home sales, and durable goods orders have rebounded sharply. The stock market is at a record high level. As a result, third quarter GDP growth should rebound by 28.0% with an additional 7.0% gain in Q4.