Summary: US Fed’s favoured inflation measure rises 0.3%; below market expectations; previous month revised up; annual rate increases for third consecutive month; Treasury bond yields mixed.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020.
The latest figures have now been published by the Bureau of Economic Analysis as part of the July personal income and expenditures report. Core PCE prices increased by 0.3% for the month, below the 0.5% which had been expected but in line with June’s increase after it was revised up from 0.2%. On a 12-month basis, the core PCE inflation rate accelerated for a third consecutive month, from 1.1% in June after revisions to 1.3%.
Longer-term US Treasury yields finished lower while yields at the front of the curve moved a touch higher. By the end of the day, the 10-year yield had lost 4bps to 0.72% while the 30-year yield finished 1bp lower at 1.50%. The 2-year yield ticked up 1bp to 0.16%.
In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months retained a slight easing bias. OIS contracts for September implied an effective federal funds rate of 0.072%, about 1bp below the current spot rate.
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It’s not the only measure of inflation used by the Fed; it also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.