When Fed policymakers look at inflation, they consider PCE since it is more representative of inflation consumers face than the Consumer Price Index (CPI). But why? You might not realize this, but CPI calculates inflation for only urban consumers, so it isn’t as representative of all shoppers in the country. PCE also includes more items in the index and bases its figures on the goods and services that consumers are buying each month, using data from the stores and businesses where they buy them. In addition, PCE will account for “substitutions” that shoppers like you and I make at the store. In other words, if we buy item X instead of item Y because Y is too expensive, PCE will reflect those differences. The CPI will not. In the end, the PCE Price Index tends to be less volatile than the figures you’ll see from the CPI. But consumers are staying resilient, and continue to buy goods and services, even with prices rising. Personal income jumped 0.4% in September, driven by higher wages as employers continue to spend more to find workers. Personal savings, while on the decline as inflation takes a toll, stood at 3.1% of disposable income. Even with PCE lower than September’s CPI reading of 8.2%, inflation is still persistently higher than the Fed would like as prices continue to rise. So next month when policymakers from the central bank meet, expect even more rate hikes. Right now, the market overwhelmingly believes it will be another big one, of 75 basis points. If you want a loan, it will only get more expensive as rates go higher. And if you are an investor, your portfolio (especially tech stocks) could be negatively impacted. This article originally appeared in ‘The Balance Today’ newsletter. You can get ‘The Balance Today’ delivered to your inbox daily, just sign up here.
