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Saturday, June 01, 2013 11:53 AM

Lowest Core PCE in History; "Flation" Perspective

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Doug Short at Advisor Perspectives has a pair of interesting reports on price inflation as measured by the PCE and PCI.

Please consider PCE Price Index Update: Sorry Fed, The Disinflationary Trend Continues.

The latest Headline PCE price index year-over-year (YoY) rate of 0.74% is a decrease from last month's adjusted 1.01%. The Core PCE index of 1.05% is decrease from the previous month's adjusted 1.17%. It is the lowest Core PCE ever recorded; the previous all-time low was 1.06% in March 1963, fifty years ago.

The continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for ten of the last 13 months since its interim high of 1.96% in March of 2012 and is now approaching half that YoY rate.

The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

click on chart for sharper image

For a long-term perspective, here are the same two metrics spanning five decades.

click on chart for sharper image
Inquiring minds may also wish to consider Two Measures of Inflation: Core PCE at Its All-Time Low

"Flation" Perspective

Inflation, deflation, and disinflation are all in the eyes of the beholder, and all depend on the definition. Still I expect another round of deflation possibly with prices but more importantly with credit, my preferred measure of "flation".

Regardless of how one measures "flation", the hyperinflationists missed the boat by a mile.

Mike "Mish" Shedlock

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