Friday, December 22, 2006

Core PCE and Savings Rate

by Calculated Risk on 12/22/2006 12:08:00 PM

The BEA reports for November:

Personal income increased $33.8 billion, or 0.3 percent, and disposable personal income (DPI) increased $27.0 billion, or 0.3 percent, in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $50.5 billion, or 0.5 percent.
Some things stay the same:
Personal saving as a percentage of disposable personal income was a negative 1.0 percent in November, compared with a negative 0.7 percent in October.
The BEA explains:
Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.
But some thing might have changed:

The Fed's favorite measure of the inflation rate - the change in the core PCE price index - was essentially unchanged in November (0.5% annualized), and the trailing six month change was 2.0% - right at the high end of the Fed's assumed target range (2%). Of course this is just one month's data.

The following graph compares the market-based core PCE vs. the Fed Funds rate for the last seven years.

Click on graph for larger image.

This follows the recent benign report on CPI. PPI was a little high, but Kash suggests: Exaggerated Inflation Worries

At this point, I believe a slowing economy is a greater risk than inflation. However the Fed apparently still thinks inflation is the greater risk (see Dr. Duy's: Fed Watch: Where’s That Recession?. Tim concluded:
"... on balance, these things most likely leave policy makers holding steady, with one foot still hovering over the break, not ready to shift to the accelerator."
If inflation stays benign, the Fed has their foot on the break even without raising rates.