August PCE Even vs July’s +0.5%, YOY Higest Since 1995, Rates Down

Overall Personal Consumption Expenditures, the Fed’s favorite measure of consumer inflation, were unchanged for August and +4.4% year over year through August (July overall PCE was 0.5%/mo and +4.5%). Overall means that the number includes prices for food and gas. The Core PCE, which excludes food and energy, was +0.2% for August and +2.4% year over year (July Core was 0.2%/mo and 2.4%). The Fed tends to look at Core PCE excluding food and energy prices because of the price volatility of these items, and the Fed’s zone for reasonable inflation is 1-2%. So even the Core number is holding above their comfort zone. The Fed’s next FOMC rate policy meeting is October 28-29.

Markets tend to look at the core number because food and especially energy prices are considered to be volatile. Given that oil was about $145 early-summer and is now $100 now. So even though the core number is the highest since 1995, markets and the Fed believe that inflation is not as big of a threat. Especially in the current credit crisis context, the Fed is doing everything it can with liquidity injections and bailouts to keep the economy from derailing. The balancing act is that they still have to watch inflation closely because if all of the credit crisis remedies work, then the economy could take off again, and the Fed would have to hike rates.

For today, rates are actually down about .25% on the Treasury bailout and Fed liquidity injection news. So the PCE has been overshadowed by that other news. If oil, jobs and housing continue on current trendlines, rates may stay low into the as we move into the fourth quarter.