June PCE +0.8%, Biggest Spike Since 1981, Fed’s Preferred Inflation Gauge

Overall Personal Consumption Expenditures were +0.8% for June and +4.1% year over year through June, which was the highest monthly spike in 27 years. Overall means that the number includes prices for food and gas. The Core PCE which excludes food and energy was +0.3% for June and +2.3% year over year. The Fed excludes what they often refer to as volatile food and energy prices and their zone for reasonable inflation is 1-2%, so even the Core number is climbing above their zone. Core PCE is the Fed’s favorite inflation gauge, and the last bit of inflation data to digest before their FOMC rate policy meeting next Tuesday.

Prevailing language in statements following the past several Fed meetings says that their goal is to balance the strains on the economy brought on by housing with inflationary pressures. Oil seems to be coming down from record high $140s and is approaching the $120 level, and the employment situation certainly suggests that housing is a drag. But we still think that as we move through the credit crisis, rates will have to rise. But if oil, jobs and housing continue on current trendlines, rates may stay low into the Fall.