Summary

Core PCE came in at +25bps for the month-over-month July reading, a highly uncharacteristic 9 basis point miss. Our miss primarily stemmed from healthcare, airfares, and tax preparation services. We will be implementing improved nowcasting techniques next month and look forward to being back on track.

A 25 basis point Core PCE reading is hawkish if taken at face value, however the strength was primarily driven by portfolio management and fees. The Portfolio management and fees category is a lagged proxy for equity market performance. This category will be revised next month, along with legal services and computer software and accessories. We expect these revisions to shave off ~20-25bps from the current year-over-year Core PCE reading.

Market-based Core PCE – which excludes food, energy, and prices not observed in market transactions – came in at 15bps for the m/m July reading and will likely quell the concerns of the moderate and dovish members, who have been embracing a more hawkish posture over the last few months. MacroSuite subscribers will be receiving updated Fed views following Jackson Hole. At this stage, the hawkish regional Fed presidents won't move the needle – the signal will come from the likes of Waller, Cook, Jefferson, and Paulson.

Underlying Inflation 

Inflation Overshoots at the Component Level

For the Detail-Oriented: Core PCE Heatmaps

Right now Core PCE (PCE less food products and energy) is on track to run at a 3.34% year-over-year pace as of July, 134 basis points above the Fed's 2% inflation target for PCE.

Contributors to the overshoot:

  • Discretionary non-automobile goods + adjacent services are adding 83 basis points.
    • Within this bucket, Tech equipment is adding 37 basis points.
  • Equity market effects are adding 27 basis points to the overshoot.
  • Healthcare services are adding 11 basis points.
  • Airfares are adding 17 basis points.
  • Food services are adding 6 basis points to the overshoot.
  • Telecommunications and broadcasting are adding 7 basis points.

The final heatmap below gives you a sense of the overshoot on shorter annualized run-rates. July monthly annualized Core PCE is running at a 2.99% annualized pace, a 99basis point undershoot vs 2% target inflation. These estimates are subject to substantial revision as more data gets released (IPI, GDP, PCE).

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

The July growth rate in "Core Services Ex-Housing" ('Supercore') PCE is running at a 3.85% year-over-year pace, a 126 basis point overshoot versus the ~2.59% run rate that coincided with ~2% Headline and Core PCE inflation.

The July monthly Supercore is running at a 3.41% annualized rate, an 82 basis point annualized undershoot of what would be consistent with 2% Headline and Core PCE. These estimates are subject to revision as more data gets released (IPI, GDP, PCE).

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