The Fed’s favorite inflation metric—the one that has Jay Powell mostly smiling during his REM dreams—showed mounting price pressures in February, as the PCE continued lrising to its highest annualized level since 1983.
Including gas and groceries (broken out by the government ostensibly because of their higher volatility), the headline Personal Consumption Expenditures index (the source of Powell’s nocturnal smiles) jumped 6.4% year over year.
Excluding food and energy prices, the so-called “core” PCE increased 5.4% from the same period in 2021.
By the way, the only reason I continue to mention the core PCE—or the core CPI for that matter—is because some readers like to know what these government-reported, nuanced numbers are doing.
So, if they’re good enough for the Fed, they're good enough for me (yes, my tongue is planted firmly in my cheek).
By Dave Allen
The Fed’s favorite inflation metric—the one that has Jay Powell mostly smiling during his REM dreams—showed mounting price pressures in February, as the PCE continued rising to its highest annualized level since 1983.
Including gas and groceries (broken out by the government ostensibly because of their higher volatility), the headline Personal Consumption Expenditures index (the source of Powell’s nocturnal smiles) jumped 6.4% year over year.
Excluding food and energy prices, the so-called “core” PCE increased 5.4% from the same period in 2021.
By the way, the only reason I continue to mention the core PCE—or the core CPI for that matter—is because some readers like to know what these government-reported, nuanced numbers are doing.
So, if they’re good enough for the Fed, they're good enough for me (yes, my tongue is planted firmly in my cheek).
Surging Prices, Damaged Spending
Surging prices continue to put a dent in consumer spending, which rose just 0.2% for the month.
Disposable personal income increased 0.4%, while inflation-adjusted disposable income actually fell 0.2%.
While the employment picture has tightened, it’s inflation that’s captured much of the attention as price increases continue.
The Fed has reacted to rapidly surging inflation by tightening policy, with an interest rate increase in March expected to be followed by hikes at each of the remaining six meetings this year.
Prices of goods climbed by 1.1% for the month, the fastest increase since October 2021, pressured by supply chain backups that have bedeviled the economy for much of the pandemic era.
Those problems were expected to be “transitory,” a description the Fed had to abandon when it finally capitulated on the loosest monetary policy in its history.
However, the price increases flipped in February from longer-lasting goods to shorter-term purchases. Inflation for durables was flat, while nondurable prices rose 1.8%.
Services inflation was held relatively in check, rising just 0.3%. However, energy prices jumped 3.7% for the month—before falling in March—while food inflation rose 1.4%.
Personal Savings a Virtual Rollercoaster
Meanwhile, personal savings trickled higher in February to $1.15 trillion, a savings rate of 6.3%.
However, Javier David writes that the era of excess savings, one of many focal points behind the nation’s labor shortage, may be coming to an end.
He points to a comprehensive study of the worker drought, where labor analytics firm Emsi Burning Glass found that “the decline in extra cash is a possible impetus for getting workers off the sidelines.”
With only 6.5 million unemployed, the firm estimated that “even if every unemployed person got a job today, a shortfall of well over 4 million workers would remain.”
As of February, there were over 11 million open jobs across the U.S., even with the pandemic pulling back and persistently high inflation forcing all but the richest consumers to pinch their Honest Abes.
And consumers have become hardened to high prices by essentially shopping their way through it, particularly by tapping their personal savings and credit limits.
But David says that yesterday’s data, which showed a drop in inflation-adjusted consumer spending, suggests that those pillars of strength are starting to rust.
Falling excess savings, from a number of sources, during the pandemic is estimated at $3 trillion and counting. And labor economists and others see that as a way to lure reluctant workers back into action.
David adds that machines are moving in on skilled workers albeit slowly. And it's feeding a rise of the robots that suggests a lot of those jobs might not be around when enough human(!) workers have returned to the labor force.
In short, the worker crunch is not long for this life.
What’s All This Leading to?
It’s no surprise then that Hope King says rapid rebound patterns in the economy may be coming to an end as consumers face a slew of new concerns this year.
She notes that consumer spending actually fell in February when inflation is taken into account.
While spending rose by 0.2% in February over January, prices rose triple that rate—0.6%—over the same period.
It’s the seasonal adjustments to these data and high inflation, King adds, that economists say have made the real PCE data volatile.
The Fed is trying to fight inflation by raising interest rates at the same time it’s attempting to promote a level of consumer demand that won't tip the economy into a recession.
If and when that happens, as I believe it could later this year or early next (i.e., a recession), expect gold and silver to soar.