January Personal Consumption Expenditure Data Does Not Justify Stricter Monetary Policy Measures
Inflation Panic Abounds, But the Data Doesn’t Support It
Depressing economic news is everywhere, and recently the January PCE (personal consumption expenditures) inflation figures sparked a wave of scary headlines about inflation. However, the underlying data do not reveal a “giant inflation shockwave,” and the only thing stubbornly high is the general level of panic.
One of the best examples of this phenomenon is the recent Wall Street Journal article by former chairman of the White House Council of Economic Advisers, Jason Furman. While most of Furman’s inflation analysis has been calm and levelheaded throughout the current inflation episode, the same cannot be said for his latest article.
It’s difficult to grasp exactly what is driving Furman’s conclusions. While he acknowledges monetary policy “operates with long and variable lags” and argues the “Fed should never react too much to any single data point,” he still calls on the Fed for a “more aggressive course of action” based on the January data. He refers to the new release as “the volatile January data, which likely was affected by unusually warm weather and seasonal quirks.”
However, when we look at the data, several problems arise with Furman’s prescription for more aggressive tightening. The overall PCE has been calming down for months, with the average increase over the previous six months being 0.22 percent. Over the prior six-month period, from January to June, the average increase was 0.64 percent. Since this data-based argument was uncontroversial until recently, why the sudden panic?
In January 2023, the monthly increase was 0.62 percent. Still, when we average the previous six months, the average increase only jumps to 0.34 percent, which is a noticeable increase, but still lower than the prior six-month average of 0.64 percent. What was driving the trend during these last few months, though? The clear driver, by major category, is serviced, with PCE goods seeing an average price decline.
The average monthly decrease in PCE goods for the prior six months (July to December) was -0.21 percent, while PCE service prices were still increasing. The average monthly increase in PCE services for the prior six months was 0.43 percent. In January 2023, PCE services still increased at a similar pace, with an increase of 0.64 percent compared to 0.56 percent in December. So, what changed in January? The change occurred in the PCE goods category.
PCE goods prices reversed course in January and increased by 0.57 percent after declining by 0.51 percent in December. (They also declined in four of the prior five months.) The next step is to examine which item(s) within the PCE goods category reversed course.
The short version: gasoline. Gas prices jumped in January, which accounts for the sudden increase in PCE goods prices. Thus, we have the only factor driving inflation rather than a widespread issue.
– There is no evidence of widespread inflation in core retail prices.
– Inflation has not yet become ingrained in consumers’ expectations or wage negotiations.
– The data does not support policy changes to tamp down high inflation.
– The recent headlines about inflation panic are based on limited and incomplete data.
– The data shows a clear driver (gasoline) behind the recent trend in PCE inflation rather than a widespread issue.
– Little evidence supports the claim that high inflation is ingrained in the economy or labor market expectations.
In conclusion, while keeping an eye on inflation is important, it’s equally important to avoid needless panic. The data does not support claims of a “giant inflation shockwave” or the need for tighter monetary policy. Instead, we should focus on factors driving prices, such as gasoline prices, and adjust policy as needed. Let’s not panic before we’re sure there’s a reason to do so.