July PCE +0.5%, YOY Highest Since 1981, Yet Rates May Stay Low

Overall Personal Consumption Expenditures, the Fed’s favorite measure of consumer inflation, were +0.5% for July and +4.5% year over year, which was the highest monthly spike since February 1981. Overall means that the number includes prices for food and gas. The Core PCE, which excludes food and energy, was +0.2% for July and +2.4% year over year. 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 September 16.

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 has come down to around the $120 level from record high $140s, which corroborates the Fed’s volatility argument. And the employment situation certainly suggests that housing is a drag—the next jobs report is next Friday, September 5. As we move through the credit crisis, rates will have to rise, it’s just a matter of when. If oil, jobs and housing continue on current trendlines, rates may stay low into the as we move into the fourth quarter.