August’s Personal Consumption Expenditures (PCE) showed that headline inflation rose 0.1% from July, while the year-over-year reading fell from 2.5% to 2.2%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, also rose 0.1% monthly. The year-over-year reading ticked higher from 2.6% to 2.7%, remaining near the lowest level in three years.
What’s the bottom line? The trend of monthly Core PCE readings have been favorable and in line with what the Fed wants to see. In fact, if we annualize the last four months of readings, Core PCE would be 1.77%, which is below the Fed’s 2% target. Plus, shelter costs remain the largest contributor to inflation, and they’re still overstated due to the lag effect. Inflation would be even lower if more real-time shelter costs were better reflected in the reporting.