Core PCE increases in US dollars monthly

Personal income increased by $71.6 billion (0.3% month-on-month) in September, according to estimates released today by the U.S. Bureau of Economic Analysis Personal disposable income (DPI), personal income minus current personal taxes, increased by $57.4 billion (0.3%) and personal consumption expenditure (PCE) increased by $105.8 billion

The PCE price index increased by 0.2% . Excluding food and energy, the PCE price index increased by 0.3% . Real personal disposable consumption price index increased by 0.1% in September and real personal disposable spending increased by 0.4%; goods increased by 0.7% and services increased by 0.2%.

The increase in current dollar personal income in September primarily reflected increases in compensation and current personal transfer receipts that were partially offset by decreases in personal interest income and property owners’ income.

The $105.8 billion increase in current dollar consumer personal spending in September reflects a $72.1 billion increase in service spending and a $33.7 billion increase in goods spending In services, healthcare, housing, and utilities (led by housing) were the largest contributors to the increase. In commodities, other non-durable goods (led by prescription medicines), food and beverages, motor vehicles and spare parts (driven by new light trucks) were the largest contributors to the increase. It has been These increases were partially offset by a decrease in gasoline and other energy commodities. Detailed information about monthly consumer personal spending can be found in Table 2.4.5U.

Personal expenditure — the sum of consumer personal spending, personal interest payments, and current personal transfer payments — increased by $106.3 billion in September. Personal savings stood at $1.00 trillion in September. The personal saving rate—personal saving as a percentage of personal disposable income—was 4.6 percent.

How does the consumer spending price index affect financial markets?

The core PCE is a critical inflation indicator that the Fed and financial markets are watching closely. Here’s how it affects financial markets:

  1. Monetary Policy Expectations:

–          The core PCE price index is the Fed’s preferred inflation measure. A higher-than-expected increase often indicates increased inflationary pressures, prompting the Fed to consider tightening monetary policy by raising interest rates. Conversely, a lower-than-expected reading may lead to more accommodative policies.

–          Impact on bonds: Higher interest rates typically lead to lower bond prices, as newer bonds offer higher yields. Thus, the core PCE report can cause volatility in the bond market as investors adjust their expectations for future price increases.

–          Impact on stocks: Higher interest rates can negatively affect stocks, especially growth stocks.

as the cost of borrowing rises and future profits are deducted at a higher rate. However, if the core personal spending index indicates controlled inflation, it could be positive for stocks, suggesting that the Fed may not need to be aggressive in raising interest rates.

  1. Inflation expectations:

–          Investors are keeping an eye on the core personal consumption price index to gauge future inflation trends. Continued increases in the index can lead to higher inflation expectations, affecting long-term investment decisions.

  1. Consumer sentiment and spending:

–          The core personal spending index reflects the purchasing power of consumers. If prices rise too quickly, it can erode disposable income and consumer confidence, leading to lower spending. This, in turn, can affect sectors such as retail and consumer goods.

–          Stock market sectors: Consumer staples and discretionary sectors are sensitive to changes in consumer spending. A rise in the core PCE could trigger a sell-off in these sectors if investors expect lower consumer demand.

The difference between the personal and basic consumption expenditure index and the impact of each

The PCE price index and the core PCE price index are both measures of inflation, but they differ in terms of the range of goods and services they cover and their specific uses. The differences are broken down below:

  1. Inclusion of food and energy:

–          Personal consumption expenditure price index: This is the broadest measure that includes all goods and services consumed by households, including food and energy prices.

–          Basic PCE Price Index: This measure excludes food and energy prices due to their volatility. The elimination aims to provide a clearer view of persistent underlying inflation trends.

  1. Use by the Federal Reserve:

–          Personal consumption expenditure price index: While the PCE index provides a comprehensive view of inflation.

the Fed does not usually refer to it in determining monetary policy because it includes volatile food and energy prices that can obscure underlying inflation trends.

–          Core PCE Price Index: The Fed favors the core PCE index as the primary measure of inflation for monetary policy decisions. It focuses on the core metric because it provides a more stable and consistent picture of inflation.

and is better aligned with the Fed’s price stability targets.

  1. Purpose:

–          Personal Consumer Price Index: Provides a broad-based measure of inflation that includes all categories of consumer spending.

and is useful for a general understanding of inflationary pressures in the economy..

–          Core Personal Consumer Price Index: focuses on long-term inflation trends by filtering out the most volatile components, making it more relevant to policy decisions and long-term economic forecasting.

  1. Market Impact:

–          Personal consumption expenditure price index: Despite its importance, the PCE index is often seen in conjunction with the baseline measure.

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