The core personal consumption expenditures price index increased 2.8 percent from a year ago in March, exceeding the Fed’s 2 percent target. The all-items PCEPI increased 2.7 percent. On a monthly basis, both measures increased 0.3 percent, equaling the increase from February.—CNBC, April 26, 2024.
What is the PCEPI?
The PCEPI is the personal consumption expenditures price index, which is a measure of the average level of the prices of all the items in the personal consumption expenditures component of GDP. The Bureau of Economic Analysis calculates real personal consumption expenditure using the chained-dollar method and calculates the PCEPI as nominal personal consumption expenditure divided by its chained-dollar real value.
How do the PCEPI core PCEPI differ?
The PCEPI and core PCEPI differ in the items included in the consumer basket. PCEPI includes all the items, but core PCEPI excludes the prices of food and energy which are more volatile than most other items. By excluding the more volatile items, core PCEPI gives a better measure of the inflation rate.
What does the change in core PCEPI from a year ago measure?
The change in core PCEPI from a year ago is the sum of the changes in the intervening months. So, core PCEPI from a year ago does not measure the current inflation rate. The change on a monthly basis is the most current reading of the inflation rate, but it includes many random influences.
How do we compare the PCEPI change from a month ago with the change from a year ago?
To compare the change from a month ago with the change from a year ago, we express the monthly change at an annual rate. In March 2024, the monthly change at an annual rate was 3.7 percent per year.
How do the annual rate of core PCEPI inflation from a month ago and from a year ago differ?
The annual rate of core PCEPI inflation rate was 2.8 percent from a year ago and 3.7 percent from a month ago.
How has core inflation changed since 2020?
Figure 1 answers this question.
Core inflation was below the Fed’s 2 percent target through most of 2020, but in December 2020, it shot upward to an annual rate of 4 percent. The year-over-year core rate climbed over the next year to peak at 5.57 percent. And at annual rates, the monthly changes bounced between 2.5 percent and 7.5 percent for two years at an average of 5 percent per year.
Then, in 2023, it looked like the Fed’s interest rate hikes had conquered inflation as the year-over-year rate continued to fall and the change over the previous month fell over 7 successive months.
But 2024 told a different story as January inflation jumped to 6 percent, and over the next two months remained above the Fed’s 2 percent inflation target.
What is the Fed’s challenge and what was its dilemma in April 2024?
The Fed’s challenge is to return inflation to its 2 percent target. Its dilemma is what interest rate setting would achieve that objective while doing the least damage to employment and real GDP growth.
Figure 2, which shows the federal funds rate and inflation rate, illustrates the Fed’s problem. The interest rate was clearly too low in 2021 when inflation took off. Then the steeply rising interest rate did a good job at first by stopping inflation increasing and then by bringing its rate down.
But has the Fed done enough to keep inflation falling? Or has it done too much and set the scene for returning inflation to its target but at the cost of bringing a recession?
That was the Fed’s dilemma in April, 2024.
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