This morning’s core inflation data for February were more benign than expected and perhaps by a wider margin than may be obvious. The overall core was up 26 basis points, which is just slightly lower than what I had factored in as the unrounded consensus. More to the point, though, the proximity of the core to the consensus was driven in large part by a fluke, as nonmarket prices not related to portfolio management added to the standard core. The Market Price Only (MPO) component of the core deflator was up just 23 basis points.
Core deflator ex-everything
Source: BEA, FH calculations, including inferences of what the informed consensus has for the underlying detail.
Data are actual to February.
Moreover, the effect of that lower figure on core services, which Powell has recently been highlighting, is leveraged. The reason is that core goods prices were up slightly more than the high 30 basis points expected. As a result, the MPO version of the Powell supercore was up just 10 basis points on the month. This is outright good news, not just less bad than expected. One month does not make a trend, as the gain last month was 58 basis points and the 3-month rate of change here is arguably still in an uptrend. But the newsthere this month was in fact friendly.
Less bad is better than more bad *
Source: BEA, FH calculations
Data are actual to February.
Meanwhile, real PCE beat handily on the month and implies that the real PCE growth is tracking closer to 2 ¼% for Q1 than to the 1 ½% I had previously “modeled,” at some risk of using too big a word. The gain of (mostly) goods consumption was closely in line with what was implied by the retail trade report and auto SAAR for February. But the services component representing 60% of PCE that is not informed by data released ahead of time was up a very strong 65 basis points, explaining the beat. There were also revisions in the back data, but the effect of them on the bean count is small relative simply to the beat this month. Somewhat related, the underlying trend of real PCE growth, looking entirely backward, is a slightly different calculation than the quarterly tracking, which can be affected by arbitrary base effects. It looks like that underlying trend is around 3%, which is also stronger than how things seemed previously.
One issue looking forward is that real income growth has recently been weak. This in combination with strength on the consumption side has allowed the saving rate to tick down again. For reasons I will get to once I have had time to deal with the BEA’s arbitrary changing of units again this month, we should never reason from the level or recent history of the measured personal saving rate. But the weaker income growth is worth taking note of, and I will do so in a follow up note.
* Larry David has called this the Obama Doctrine.
—
Information provided by Front Harbor LLC has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy is not guaranteed. No claim is made regarding the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. Views and other information provided here are subject to change without notice. All reports produced by Front Harbor are issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security or fund. The analyst authoring reports from Front Harbor may have positions in some of the securities discussed here.
