Worst Monthly Spike of “Core Services” PCE Inflation in 22 Years, and Not Just Housing: Powell’s Gonna Have Another Cow

Core services inflation dished up bad head fakes last time we had this mess in 1966-1982. Mention of a rate hike crops up in a Fed speech.

Over the past year or so, the Fed has been intensely discussing inflation in “core services,” which is where inflation had shifted to in 2022, from goods inflation which had spiked into mid-2022 but then cooled dramatically. So “core services” is where it’s at. Core services are where consumers spend the majority of their money. Core services are all services except energy services. Core services inflation has been behaving badly for months, and in January, it spiked out the wazoo.

The “core services” PCE price index spiked to 7.15% annualized in January from December, the worst month-to-month jump in 22 years (blue line), according to index data released today by the Bureau of Economic Analysis. Drivers of the spike were non-housing measures as well as housing inflation. More on each category in a moment.

The six-month moving average, which irons out the month-to-month volatility, accelerated to 3.95% annualized, the worst since July, after having gotten stuck at the 3.5% level for three months in a row (red).

The bad behavior of core services inflation that we have been lamenting since June – and which was confirmed earlier this month by the nasty surprise in the CPI – is why Fed governors have said this year in near unison that they’re in no hurry to cut rates, but have taken a wait-and-see approach. And now the concept of rate hikes is cropping up in their speeches again.

For example, Fed governor Michelle Bowman said in the speech yesterday, that she was “willing to raise the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or reversed.”

Even year-over-year, core services inflation has now reversed and accelerated to 4.1%.

*****

Continue reading this article at Wolf Street.