The monthly US PCE report is one of my favourite. US consumption is not just a bit part of the US economy, but a big part of the engine that has driven global growth these past few decades.
The August PCE report had a few okay signs, but was mostly in the realms of ‘not good enough’. The trends remain ‘too slow’ PCE growth: an output gap found by passing a line through historical growth shows that the difference is getting larger — not what you want at this stage of the cycle.
My guess is that this very large ‘demand gap’ is a decent part of the reason that global inflation remains low.
On this subject, the August PCE report showed still-tame inflation.
Headline PCE inflation picked picked up 60bps to a 1.7% AR pace in August, and volatile prices were not a large part of the story (ex food and fuel was 1.9% AR, while trimmed mean PCE was 1.6% AR). After peaking early in 2012, trend inflation pressures have eased markedly (the 6mma AR is 1.1%y/y, and the annual pace is 1.2%).
Trimmed mean PCE inflation was 1.6% AR on the month, taking the 6mma AR down 10bps to1.2%% (YoY 1.3%). That’ a very low (broad based) inflation pulse.
All told, i think that inflation pressures are too low for the FOMC to contemplate tightening policy. indeed, i think it was a mistake to discuss tapering at all — without the 85bn/m of bond buying, growth would be slower, unemployment higher, and inflation lower.