The Bureau of Economic Analysis released its Inflation report on Friday called Personal Consumption Expenditures or PCE. This is also the Federal Reserve’s favorite report when it comes to measuring inflation. In this report, we saw that inflation rose 0.4% in September, which came in slightly higher than estimates. On a yearly basis, PCE decreased from 3.5% to 3.4%, which is in line with the estimates. Core PCE, which strips out food and energy prices, and is the main focus of the Federal Reserve, rose 0.3% but decreased from 3.9% to 3.7% year over year. This came in line with the estimates forecasted.
Digging deeper into this report we saw that personal income rose 0.3% last month, however, personal spending rose 0.7%, which was above estimates. The savings rate has been steadily falling and, in this report, it fell some more to just 3.4%. The savings rate was at 5.3% just back in May of this year and almost hitting 8% in early 2020. During the worst parts of the Great Recession, the savings rate was 2.4%. We do see that consumers are spending, especially in Q3 of this year. We saw this evident in the Q3 Gross Domestic Product report, but the current pace of spending is not sustainable. We see this based on the rate of savings depleted and outstanding credit increasing.
A silver lining is that as inflation falls, interest rates follow. Historically, this relationship has been woven much tighter but because the Fed has had a very tough stance of late, the relationship has grown a bit further. As inflation continues to lessen and as the Fed loosens up its policy and begins to speak with more of a dovish or accommodative tone, we will see interest rates begin to improve.
Source : https://bit.ly/38TtjP2
By: Jon Iacono