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October 2024 PCE and Inflation

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PCE increased by 2.3% year-over-year in October, with data indicating robust consumer spending during the month. This suggests the U.S. economy continued its strong growth momentum, although efforts to reduce inflation seemed to have hit a plateau.

Image courtesy of interviewee. December 2, 2024

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This video discusses recent trends in U.S. inflation, household income, and the potential impact of new government policies. Key points include:

1. **Inflation Trends**: CPI (Consumer Price Index) and PPI (Producer Price Index) inflation have shown acceleration, particularly in core services such as health insurance and travel. This video trend raises concerns about persistent inflation.

2. **Economic Drivers**: The current economic growth is primarily income-driven rather than credit-driven. Household income from wages has been growing at a rate that exceeds expectations based on a 2% inflation target set by the Federal Reserve, leading to strong consumption growth.

3. **Federal Reserve Policy**: The Fed's dual mandate includes controlling inflation and maximizing employment. Recent disinflation and rising unemployment rates led to a calibration of interest rates, with the expectation of cautious rate cuts in the near future, especially in response to the uncertain economic environment influenced by new administration policies.

4. **Policy Uncertainty and Inflation**: The potential for significant increases in tariffs under the new administration could lead to stagflationary impacts, particularly if enacted suddenly. Gradual changes may allow for better adaptation by businesses, but uncertainty remains high, especially regarding immigration policies which could affect labor supply.

5. **Independence of the Federal Reserve**: Concerns are raised about attempts to influence the Fed's independence, which historically has been crucial for maintaining stable inflation and healthy economic growth. A loss of this independence could lead to increased inflation expectations and volatility.

6. **Future Outlook**: The economy is expected to remain strong in the first half of 2025 due to robust consumption, but there is concern that increased policy uncertainty could dampen growth in the second half of the year. This video might slow investment and overall economic momentum.

Overall, the text conveys a cautious optimism about the near-term economic outlook while emphasizing the risks posed by policy changes and inflation dynamics.

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Here are five key points from the video:

1. **Inflation Measures Overview**: The video discusses recent data on inflation, specifically Consumer Price Index (CPI) and Producer Price Index (PPI), indicating that core services inflation is driving these increases, particularly in areas like health insurance, travel, and education.

2. **Strong Household Income Growth**: It highlights that household wage income has been growing significantly, exceeding the levels consistent with the Federal Reserve’s target of 2% inflation. This growth is a critical driver of consumer spending and demand in the economy.

3. **Federal Reserve's Monetary Policy**: The video underscores the Fed's cautious approach to cutting interest rates, referencing a previous acknowledgment that rates may have been too high in light of increasing unemployment and inflation trends. The Fed is likely to be careful in making further rate cuts in the near future.

4. **Impact of Tariffs and Supply Chains**: The potential implementation of tariffs by the new administration is discussed, which could lead to immediate price level increases and long-term inflationary pressures due to shifts in supply chains and production costs. A gradual approach to tariffs could mitigate these effects.

5. **Concerns Over Central Bank Independence**: There is anxiety about the current administration's influence on the Federal Reserve's independence. The video warns that diminished autonomy of the Fed could lead to negative consequences for inflation control and economic stability, emphasizing the importance of central bank independence for maintaining steady growth and employment.

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Here are some key quotes extracted from the video :

1. **Inflation Measures and Trends**:
- "We've seen a similar pattern... for PCE inflation... basically the drivers have been the same."

2. **Services Inflation**:
- "It’s largely services inflation that's really picking up, core services in particular."

3. **Household Income Growth**:
- "Household income out of wages has been growing really fast... income is really growing strong, it's outpacing what really should be in line with 2% inflation."

4. **Consumption and Economic Growth**:
- "Consumption growth is higher than its trend growth rate... the economy is very strong and it's really driven by strong income growth that keeps spending and demand above trend."

5. **Federal Reserve's Dual Mandate**:
- "The Fed has like a dual mandate... not only the inflation target, but also maximum employment."

6. **Policy Rate Observations**:
- "You could actually make the argument that going into the September meeting, the Fed's policy rate was about a hundred basis points too high."

7. **Impact of Tariffs**:
- "You're gonna have a big massive stagflationary shock basically in 2025... tariffs have kind of two particular impacts."

8. **Concerns About Central Bank Independence**:
- "The most worrying part of what this administration wants to do... is the independence of the Fed."

9. **Long-Term Economic Stability**:
- "Central bank independence is kind of key in keeping inflation under control... it's gonna be very hard to put a genie back in the bottle in terms of accelerating inflation."

10. **Future Economic Outlook**:
- "I see the economy in good shape in the US driven again by strong consumption... it’s gonna be the second half of the year when all these policy proposals will start to kind of...”

These quotes capture significant themes about inflation, household income, consumer spending, the role of the Federal Reserve, and anticipated challenges with policy changes.

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Earlier in the month, we had data on CPI inflation,

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which is an alternative measure as well as PPI inflation,

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which is basically wholesale prices.

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And a lot of the, the components of those,

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inflation measures actually move, were actually used

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to construct PC inflation

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and then they have been accelerating as well.

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So it was pretty much expected.

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And to be honest, you've seen a similar pattern,

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like in a previous month for, for PCE inflation.

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So this is kind of in line what we kind of feared.

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Basically the drivers have been the same

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as last months as well.

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So it's, it's largely services inflation

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that's really picking up core services in particular.

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Um, as you know,

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there's been this longstanding debate about rent inflation

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and OAR that's a little bit less important for PC inflation

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'cause it just gets a much lower weight than the,

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the more broadly cited CPI inflation measure

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where it's really, really a big component.

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It's really the other core services components in PC

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that also have been picking up.

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So health insurance, travel services, you know,

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the things like that education, that's,

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that's all has been picking up,

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over the last three months really.

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Uh, not yet. I mean, you know, you have to remind,

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yourself that this was still for October.

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So, and, and really the,

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the Trump trade really picked up in November just

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before the election and certainly after that.

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So that, that might be something that we should expect,

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you know, at, at, at the end

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of this month when we get actually the November data there.

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So it, it takes a little bit of time

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to really feed into that.

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So basically because of the timing, not yet I would say,

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but yeah, it's forthcoming PC report that we,

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we we're speaking about now, about now as a,

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as a couple of components, right?

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So it's inflation, but there's also a lot

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of information about household income,

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and consumption spending.

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So what has struck me in this report, not only this month,

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but like really since 21, is that household income out

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of wages has been growing really fast.

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Um, and if you kind

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of benchmark those growth rate against a more medium term,

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level where, you know, in line with 2% PC inflation,

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which is the fed's own inflation target,

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and you combine it with trend productivity and,

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and things like that, wage,

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household wage income growth has been really growing a lot

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stronger than, than, than you know, what you would expect

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to be in line with,

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with 2% inflation over the medium term.

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So this really is a, and I I've been mentioned that

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before in, in other platforms, you know, this, this cycle,

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this cycle in the US is really income driven, right?

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So income is really growing strong, it's outpacing

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what really should be, should be in line with,

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2% inflation of the median term. And,

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And, and it's not a credit, credit driven cycle.

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So, you know, a credit card debt, al auto loans,

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if you just, you know, compared it to growth of income

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that has been relatively contained, it's really income,

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growth that has been, driving the cycle.

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And you see it also that, consumption growth is,

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is higher than, than its trend, trend, growth rate.

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So the economy is, is very strong

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and it's really driven by strong ingrow growth

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that keeps spending and demand above the, above trend.

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Essentially, inflation is sticky

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because most of the consumption in the US

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is also on services.

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So you have this, you know, this self-fulfilling,

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you know, cycle that's going on at the moment in the us

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I would think so, I mean, so you have to remind yourself

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that the Fed has like a dual mandate in the us So it's not

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only the inflation target,

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this maximum employment over the long term.

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And what we've seen in the earlier part of this year

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was disinflation and we saw, unemployment,

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moving up,

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and I I, my opinion that was all driven

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by increased labor supply, driven by immigration,

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or at least a delayed impact of I immigration in, in 2023

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and early 2024.

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So coming into the September meeting, the Fed kind of,

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acknowledged that the,

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policy rate was basically too high given, you know, the,

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the, the, the increase in the unemployment rate

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and disinflation.

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And you could actually make the argument

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that going into the, in the September meeting, the,

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the Fed funds rate, you know,

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the fed's policy rate was about a hundred

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basis points too high.

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Now, going into this month's meeting, a further 25 basis,

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BA basis, polish rate cut would actually kind of

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complete this recalibration

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because that really was the intention of starting the,

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the rate cutting cycle back in September.

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And if you kind of combine that with the fact that,

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you know, inflation is kind of picking up again, yeah,

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you could make the case that beyond December,

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the Fed is gonna be extremely cautious in cutting the rates,

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polish rates further down.

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Uh, you could definitely see them standing on low on hold

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for, for at least, the first quarter of next year.

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And on top of that, they also are dealing

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with like an internal discussion about

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where the neutral rate level is.

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Yeah, the Fed is not gonna be keen to cut that much more

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beyond December because there's a lot

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of uncertainty still about what they, what they want to do,

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what this new administration wants to,

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but also the timing, right?

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So for example, tariffs, that's kind of the most discussed,

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aspect of, of the new administration's policy, you know,

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if they decide to go with a big bang, so, you know, all the,

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the 25 percent terrorists of Mexico and Canada

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and a hundred percent on, on, on, on China all at once,

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you're gonna have a big massive stagflationary shock

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basically in the, in 2025 already.

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Um, but, you know, and

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and terrors have kind of two particularly impacts.

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So the initial impact is like a sales tax hike, right?

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So you get a big jump in the price level

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and everybody has to deal with that.

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And, but there's also a second round effect, namely,

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you know, supply chains will start to shift again.

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Uh, so you get more nearshoring,

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maybe onshoring into the US itself.

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Uh, that usually means also more expensive production

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of all these goods.

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Uh, and that got in, you know, over the median term,

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like a two year rise will keep inflation sticky again,

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you know, sticky inflation is kind of the theme here.

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So, but then again, if the implementation is decided

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to be more gradual, so, you know, 25% increase in terrorists

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or Mexico say, but spread out over four

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or five years, that's a much more benign impact, right?

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A much more gradual impact and, and firms can adapt

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and you get a more gradual impact on inflation as well.

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So there's a lot of uncertainty in that,

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and I'm, I'm not so sure that the intention really is to go

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with like a, a big initial big bang approach

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because another, intention of

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pursuing higher terrorists

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for this new administration is also to kind

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of get an additional source

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of revenue for the government, right?

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So it's kind of increasing indirect taxation basically.

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So it's, it's a lot of uncertainty on that part.

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Um, and that is migration is another issue, that,

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that's a big, that's a big priority

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for this new administration.

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Um, I mean, migration as a source

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of labor supply growth is already cut off

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by the current Biden administration, so I'm not so sure

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that's gonna make a big difference.

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The only difference will be if they really gonna pursue this

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proactive deportation of, of recent immigrants out

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of the US against, so you're basically gonna kind

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of purposely try to shrink the labor supply in the us

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That would be a very bad thing.

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But again, that's a very costly exercise.

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So again, there's a lot of uncertainty on that.

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And the third aspect is fed independence for which

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for me is the most worrying part of, of, of

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what this administration wants to do.

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So Chair Powell's term is coming up in 2026,

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a lot Chris Wallace's term, this is, quite an impactful,

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member of the board of governance, governors

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of the Federal Reserve is also coming up, later in 2026.

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So there, there, there are a lot of appointments that need

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to be renewed by this administration.

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And, you know, the sounds that you get from, you know, key,

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key, person personnel of this new administration

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and especially the the new Treasury secretary, secretary, is

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that they kind of want to reshape, the, the, the, the,

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the Fed in, in, you know, along their own lines

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and being, yeah, basically try to, kind of

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make the fed less, less independence.

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And that's, that's for me in a long term is most worrying

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part really over the past couple of decades, both,

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practice as well as academic research has shown

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that central bank independence is kind

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of key in keeping inflation on the control,

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keeping inflation stable and, relatively low, level.

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And, and that has been whatever economy you look,

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look at, this really across like hundreds of, of

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of countries and economies, it's, it's kind

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of a key stone in, in keeping, you know,

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having stable growth, having a stable, employment growth

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and, and, and whatever, economy you have, you, you start

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to t with that,

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it's gonna be credibility is gonna be

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out of the, the, the window.

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You potentially could have inflation expectations that start

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to drift up, you know, structurally.

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Uh, and then basically it's, it's gonna be very hard to,

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to put a genie back in the bottle, so to speak, in terms

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of, accelerating inflation.

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So I think an independent central bank in general, whether

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that's in the US or elsewhere, is kind of key, for,

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for having structurally, healthy rates of growth

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and, and employment growth.

211
00:10:29.245 --> 00:10:30.765
I think the, the economy is,

212
00:10:30.785 --> 00:10:32.685
is gonna be pretty strong still.

213
00:10:33.125 --> 00:10:36.405
I mean, I, I don't see, again, I'm going, coming,

214
00:10:36.405 --> 00:10:37.885
coming back to this income growth,

215
00:10:38.045 --> 00:10:41.325
I don't see the dissipating, for, for a while.

216
00:10:41.745 --> 00:10:44.685
So certainly this, the, the first half of 2025,

217
00:10:44.925 --> 00:10:48.885
I see the economy, in good shape in the US driven again,

218
00:10:48.985 --> 00:10:50.485
by strong consumption.

219
00:10:51.305 --> 00:10:54.405
Um, it's gonna be the, the second half of the,

220
00:10:54.465 --> 00:10:56.845
of the year when really, you know,

221
00:10:56.845 --> 00:11:00.605
all these policy proposals will start to kind of, you know,

222
00:11:00.865 --> 00:11:02.405
get some meat on the bone, then,

223
00:11:02.675 --> 00:11:04.005
then I'm a little bit more worried.

224
00:11:04.025 --> 00:11:08.485
And increased policy uncertainty for any economy is, is kind

225
00:11:08.485 --> 00:11:10.485
of a little bit of a damper on, on,

226
00:11:10.485 --> 00:11:11.845
especially investment growth.

227
00:11:11.905 --> 00:11:14.445
So it could be that we gonna see some, some sort

228
00:11:14.445 --> 00:11:16.205
of a slow down, not, not a recession,

229
00:11:16.205 --> 00:11:19.925
but little bit of a pair backing in, in growth,

230
00:11:19.985 --> 00:11:23.005
in the second half of, of, of next year, just on the back

231
00:11:23.125 --> 00:11:24.925
of this increased policy uncertainty.

Analyzing Recent Trends in Inflation Metrics

00:00:00 - Earlier in the month, we had data on CPI inflation, which is an alternative measure as well as PPI inflation, which is basically wholesale prices. And a lot of the, the components of those, inflation measures actually move, were actually used to construct PC inflation and then they have been accelerating as well. So it was pretty much expected. And to be honest, you've seen a similar pattern, like in a previous month for, for PCE inflation. So this is kind of in line what we kind of feared. Basically the drivers have been the same

00:00:34 - So it's, it's largely services inflation that's really picking up core services in particular. as you know, there's been this longstanding debate about rent inflation and OAR that's a little bit less important for PC inflation 'cause it just gets a much lower weight than the, the more broadly cited CPI inflation measure where it's really, really a big component. It's really the other core services components in PC

00:01:06 - So health insurance, travel services, you know, the things like that education, that's, that's all has been picking up, over the last three months really. not yet. I mean, you know, you have to remind, yourself that this was still for October. So, and, and really the, the Trump trade really picked up in November just before the election and certainly after that. So that, that might be something that we should expect, you know, at, at, at the end

Household Income Growth and Inflation Dynamics

00:01:37 - So it, it takes a little bit of time to really feed into that. So basically because of the timing, not yet I would say, but yeah, it's forthcoming PC report that we, we we're speaking about now, about now as a, as a couple of components, right? So it's inflation, but there's also a lot of information about household income, and consumption spending. So what has struck me in this report, not only this month, but like really since 21, is that household income out of wages has been growing really fast.

00:02:11 - of benchmark those growth rate against a more medium term, level where, you know, in line with 2% PC inflation, which is the fed's own inflation target, and you combine it with trend productivity and, and things like that, wage, household wage income growth has been really growing a lot stronger than, than, than you know, what you would expect to be in line with, with 2% inflation over the medium term.

00:02:43 - before in, in other platforms, you know, this, this cycle, this cycle in the US is really income driven, right? So income is really growing strong, it's outpacing what really should be, should be in line with, 2% inflation of the median term. And, And, and it's not a credit, credit driven cycle. So, you know, a credit card debt, al auto loans, if you just, you know, compared it to growth of income

Analyzing Stagnation and Consumer Growth in the US Economy

00:03:13 - growth that has been, driving the cycle. And you see it also that, consumption growth is, is higher than, than its trend, trend, growth rate. So the economy is, is very strong and it's really driven by strong ingrow growth that keeps spending and demand above the, above trend. Essentially, inflation is sticky because most of the consumption in the US is also on services. So you have this, you know, this self-fulfilling,

00:03:45 - I would think so, I mean, so you have to remind yourself that the Fed has like a dual mandate in the us So it's not only the inflation target, this maximum employment over the long term. And what we've seen in the earlier part of this year was disinflation and we saw, unemployment, moving up, and I I, my opinion that was all driven by increased labor supply, driven by immigration,

00:04:19 - and early 2024. So coming into the September meeting, the Fed kind of, acknowledged that the, policy rate was basically too high given, you know, the, the, the, the increase in the unemployment rate and disinflation. And you could actually make the argument that going into the, in the September meeting, the, the Fed funds rate, you know, the fed's policy rate was about a hundred basis points too high.

Fed's Cautious Approach Amidst Inflation Concerns and Tariff Discussions

00:04:50 - BA basis, polish rate cut would actually kind of complete this recalibration because that really was the intention of starting the, the rate cutting cycle back in September. And if you kind of combine that with the fact that, you know, inflation is kind of picking up again, yeah, you could make the case that beyond December, the Fed is gonna be extremely cautious in cutting the rates, polish rates further down.

00:05:21 - for, for at least, the first quarter of next year. And on top of that, they also are dealing with like an internal discussion about where the neutral rate level is. Yeah, the Fed is not gonna be keen to cut that much more beyond December because there's a lot of uncertainty still about what they, what they want to do, what this new administration wants to, but also the timing, right? So for example, tariffs, that's kind of the most discussed, aspect of, of the new administration's policy, you know,

00:05:54 - the 25 percent terrorists of Mexico and Canada and a hundred percent on, on, on, on China all at once, you're gonna have a big massive stagflationary shock basically in the, in 2025 already. but, you know, and and terrors have kind of two particularly impacts. So the initial impact is like a sales tax hike, right? So you get a big jump in the price level

Inflation Dynamics and Supply Chain Challenges

00:06:22 - And, but there's also a second round effect, namely, you know, supply chains will start to shift again. so you get more nearshoring, maybe onshoring into the US itself. that usually means also more expensive production of all these goods. and that got in, you know, over the median term, like a two year rise will keep inflation sticky again, you know, sticky inflation is kind of the theme here. So, but then again, if the implementation is decided

00:06:56 - or Mexico say, but spread out over four or five years, that's a much more benign impact, right? A much more gradual impact and, and firms can adapt and you get a more gradual impact on inflation as well. So there's a lot of uncertainty in that, and I'm, I'm not so sure that the intention really is to go with like a, a big initial big bang approach because another, intention of pursuing higher terrorists

00:07:25 - of get an additional source of revenue for the government, right? So it's kind of increasing indirect taxation basically. So it's, it's a lot of uncertainty on that part. and that is migration is another issue, that, that's a big, that's a big priority for this new administration. I mean, migration as a source of labor supply growth is already cut off by the current Biden administration, so I'm not so sure that's gonna make a big difference.

Concerns Over Immigration Policy and Fed Independence

00:07:59 - proactive deportation of, of recent immigrants out of the US against, so you're basically gonna kind of purposely try to shrink the labor supply in the us That would be a very bad thing. But again, that's a very costly exercise. So again, there's a lot of uncertainty on that. And the third aspect is fed independence for which for me is the most worrying part of, of, of what this administration wants to do.

00:08:31 - a lot Chris Wallace's term, this is, quite an impactful, member of the board of governance, governors of the Federal Reserve is also coming up, later in 2026. So there, there, there are a lot of appointments that need to be renewed by this administration. And, you know, the sounds that you get from, you know, key, key, person personnel of this new administration

00:09:00 - that they kind of want to reshape, the, the, the, the, the Fed in, in, you know, along their own lines and being, yeah, basically try to, kind of make the fed less, less independence. And that's, that's for me in a long term is most worrying part really over the past couple of decades, both, practice as well as academic research has shown that central bank independence is kind of key in keeping inflation on the control,

Central Bank Independence and Economic Stability

00:09:33 - And, and that has been whatever economy you look, look at, this really across like hundreds of, of of countries and economies, it's, it's kind of a key stone in, in keeping, you know, having stable growth, having a stable, employment growth and, and, and whatever, economy you have, you, you start to t with that, it's gonna be credibility is gonna be

00:10:01 - You potentially could have inflation expectations that start to drift up, you know, structurally. and then basically it's, it's gonna be very hard to, to put a genie back in the bottle, so to speak, in terms of, accelerating inflation. So I think an independent central bank in general, whether that's in the US or elsewhere, is kind of key, for, for having structurally, healthy rates of growth and, and employment growth. I think the, the economy is,

00:10:33 - I mean, I, I don't see, again, I'm going, coming, coming back to this income growth, I don't see the dissipating, for, for a while. So certainly this, the, the first half of 2025, I see the economy, in good shape in the US driven again, by strong consumption. it's gonna be the, the second half of the, of the year when really, you know, all these policy proposals will start to kind of, you know,

Policy Uncertainty May Slow Economic Growth

00:11:23 - then I'm a little bit more worried. And increased policy uncertainty for any economy is, is kind of a little bit of a damper on, on, especially investment growth. So it could be that we gonna see some, some sort of a slow down, not, not a recession, but little bit of a pair backing in, in growth, in the second half of, of, of next year, just on the back of this increased policy uncertainty.

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