What Does The Latest PCE Inflation Data Mean For Investors?

Key takeaways

• A crucial indicator of inflation (and the Fed’s favorite), PCE focuses on household spending
• Core and headline PCE increased by 0.4% in May
• Whether this leads to interest rate hikes remains to be seen in June

Inflation is the word on everyone’s lips, and the Fed’s preferred method of measuring inflation has just been updated. The latest Personal Consumption Expenditure (PCE) price index figures were released last week, so let’s look at what that means for investors. Are we edging closer to a recession?

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What’s PCE all about?

PCE is Personal Consumption Expenditure, a metric that focuses on household expenditure over the previous month. It accounts for spending on pretty much everything from food to legal advice, having three categories:

• Durable goods last three years or longer, including things like furniture and vehicles
• Non-durable goods last under three years, including energy, food, and cosmetics
• Services are exactly what they sound like, including housing and healthcare

Core PCE excludes food and energy, as these two sectors can have dramatic price swings, potentially masking signs of inflation.

While many use the Consumer Price Index (CPI) to measure inflation, the PCE Price Index (PCEPI) accounts for a wider range of goods and services. That’s why it’s been the Fed’s preferred measure of inflation since 2012.

PCE isn’t just an indicator of inflation, though. Consumer spending hugely influences Gross Domestic Product (GDP), signaling a country’s financial strength.

Falling consumer spending can indicate a looming recession as people struggle with the financial impact of inflation. Higher PCE can reflect higher prices of goods and services.

What’s the latest PCE report say?

May’s PCE report isn’t looking too great. Core PCE increased by 0.4% compared to the expected 0.3%, with the annualized figure sitting at 4.7% from last month’s 4.6%.

Headline PCE rose 0.4% as expected, bumping the annualized figure to 4.4% from 4.2%.

As a key measure of inflation, this PCE report will influence monetary policy. The Fed may increase interest rates again to try and stave off inflation, but right now most analysts are still betting on a pause in rate hikes at the next Fed meeting.

After its tenth interest rates hike in 14 months earlier this month, the Fed has to think carefully about its next move. While 0.25% increases don’t seem like much, they build up quickly and impact borrowing capabilities and the economy dramatically.

The bottom line

Higher rates played a role in the collapse of three regional U.S. banks this year, so another increase is not a measure to take lightly.

For investors, the prospect of another rate hike could mean we’re due for more volatility in the markets, and the U.S. could potentially be pushed into a recession. It’s one to watch.

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