Personal income increased by $71.1 billion (0.3% month-on-month) in November, according to estimates released today by the US Bureau of Economic Analysis. Disposable personal income (DPI), personal income minus current personal taxes, increased by $61.1 billion (0.3%) and personal consumption expenditures (PCE) increased by $81.3 billion (0.4%).
The real disposable PCE price index increased by 0.2% in November and real PCE increased by 0.3%; goods increased by 0.7% and services increased by 0.1%.
Personal income in current dollars increased in November, primarily due to a rise in compensation. A decrease in personal income receipts on assets and current personal transfer receipts partially offset this increase.
The $81.3 billion increase in current-dollar personal consumption spending in November reflected a $48.3 billion increase in spending on goods and a $33.0 billion increase in spending on services. Among goods, motor vehicles and parts (led by new motor vehicles) and recreational goods and vehicles (led by video, audio, photography, and information processing equipment and media) were the largest contributors to the increase.
Among services, spending on financial services and insurance (led by financial service fees and commissions); entertainment services (led by membership clubs, sports centers, parks, theaters, and museums, as well as gambling); and health care (led by hospitals) were among the largest contributors to the increase. Detailed information on monthly personal consumption spending can be found in Table 2.4.5U.
Personal expenditures—the sum of personal consumption spending, personal interest payments, and personal current transfer payments—increased $78.2 billion in November. Personal saving totaled $968.1 billion in November, and the personal saving rate—personal saving as a percentage of disposable personal income—was 4.4%.
How does the core PCE price index affect financial markets?
The core PCE price index is a highly important inflation indicator that the Federal Reserve and financial markets watch closely. Here’s how it affects financial markets:
- Monetary policy expectations:
- The core PCE price index is the Fed’s preferred inflation gauge. A higher-than-expected increase often signals rising 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. Therefore, the core PCE report can cause volatility in the bond market as investors adjust their expectations for future rate increases.
- Impact on stocks: Higher interest rates can negatively affect stocks, especially growth stocks, as the cost of borrowing increases and higher rates discount future earnings. However, if the core PCE index points to controlled inflation, this can be positive for stocks, suggesting that the Fed may not need to be as aggressive in raising interest rates.
- Inflation expectations:
- Investors watch the core PCE index to gauge future inflation trends. Sustained increases in the index can lead to higher inflation expectations, which impacts long-term investment decisions.
- Consumer sentiment and spending:
- The core PCE index reflects the purchasing power of consumers. If prices rise too quickly, this can erode disposable income and consumer confidence, leading to lower spending. This in turn could impact 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 price index could lead to selling in these sectors if investors anticipate lower consumer demand.
Difference between PCE and Core and their impact
The PCE price index and the core PCE price index are both measures of inflation, but they differ in the scope of goods and services they cover and their specific uses. The differences are detailed below:
- Inclusion of food and energy:
- PCE price index: This is the broadest measure that includes all goods and services consumed by households, including food and energy prices.
- Core PCE price index: This measure excludes food and energy prices due to their volatility.
- Use by the Federal Reserve:
- PCE price index: While the overall PCE price index provides a comprehensive view of inflation, the Fed does not typically refer to it in monetary policy because it includes volatile food and energy prices that can obscure underlying inflation trends.
- Core PCE price index: The Fed prefers the core PCE as a primary measure of inflation for monetary policy decisions. It focuses on the core measure because it provides a more stable and consistent picture of inflation and aligns better with the Fed’s goal of price stability.
- Purpose:
- PCE Price Index: Provides a broad measure of inflation that includes all categories of consumer spending, and is useful for a general understanding of inflationary pressures in the economy.
- Core PCE 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.
- Market Impact:
- PCE Price Index: Despite its importance, the PCE is often viewed in conjunction with the core measure.
- Core PCE Price Index: Because the Fed closely watches it, it directly and significantly impacts financial markets.
Both indicators are important, but the core PCE is particularly important in influencing financial markets.
