Most of the Personal Consumption Expenditures (PCE) inflation gauges are sourced from Consumer Price Index (CPI) data, but Producer Price Index (PPI) input data is of increasing relevance, import price index (IPI) data can prove occasionally relevant. There are also some high-leverage components that only come out on the days of the GDP and PCE releases.

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Summary: PCE Nowcasts

There's not a lot we learned today. Our nowcasts for July Core PCE were ultimately 2 basis points too low but that is well within a standard error. Our modeling of Q2 PCE revisions at the monthly level proved to be highly accurate. The takeaways this month are that we're continuing to see slowing in services inflation, particularly outside of housing. The Fed has additional confidence to proceed with a cut in September. The August jobs report will and should be the primary determinant for how much easing is worth pursuing.

For the Detail-Oriented: Core PCE Heatmaps

Right now, Core PCE (PCE less food products and energy) is running at a 2.62% year-over-year pace as of July, 62 basis points above the Fed's 2% inflation target for PCE. That overshoot is disproportionately driven by catch-up rent CPI inflation in response to the surge in household formation (a byproduct of rapidly recovering job growth) and market rents in 2021-22. Rent is on track to contribute 33 basis points to the 62 basis point Core PCE overshoot.

There are other contributors to the overshoot:

  • Some more supply-driven (food inputs likely adding 10 basis points to the overshoot, unwinding motor vehicle bottlenecks now likely subtracting 20 basis points after being a substantial contributor)
  • Some more demand-driven (in-person recreation and lodging services likely adding 2 basis points to the overshoot)
  • Some oddball segments have offsetting effects (measured financial service charges now likely adding 11 basis points, while contributions from input cost indices and imputed financial services likely adding 10 basis points to Core PCE vs 2%-consistent outcomes).

The final heatmap below gives you a sense of the overshoot on shorter annualized run-rates. July monthly annualized Core PCE ran at a 1.95% annualized pace, a 5 basis point undershoot vs 2% target inflation.

For the Detail-Oriented: Core Services Ex Housing PCE Heatmaps

In July, "Core Services Ex Housing" ('Supercore') PCE ran at a 3.26% year-over-year pace, a 67 basis point overshoot versus the ~2.59% run rate that coincided with ~2% headline and Core PCE.

July monthly supercore is on track to run at a 2.58% annualized rate, a 1 basis point annualized undershoot of what would be consistent with 2% Headline and Core PCE.