CPI vs. CPE Inflation

Economic

Summary:

Confused by CPI and PCE inflation? Don't be! This guide explains the differences, why they matter, and how to use them to understand rising prices and make smart financial decisions.

Inflation is a constant concern for consumers, businesses, and policymakers alike. It represents the rising cost of goods and services over time, eroding purchasing power. However, measuring inflation with absolute precision is no easy feat. Two key metrics used in the US are the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). While both track inflation, they offer slightly different perspectives. Understanding these differences is crucial for interpreting economic data and making informed decisions.

The Consumer Price Index (CPI): A Familiar Benchmark

The CPI, published monthly by the Bureau of Labor Statistics (BLS), is a widely recognized measure of inflation. It tracks the average change in prices for a basket of goods and services typically purchased by urban consumers. The BLS surveys households across the country to determine the relative weight of different categories like housing, food, transportation, and healthcare within this basket. Price changes in each category are then averaged to arrive at the overall CPI inflation rate.

The Personal Consumption Expenditures Price Index (PCE)

The PCE, produced by the Bureau of Economic Analysis (BEA), offers a complementary perspective. It measures the change in prices of goods and services consumed by all households in the US, including spending by non-profit institutions serving households. This broader scope takes into account government spending programs that directly impact the cost of living, unlike the CPI. Additionally, the PCE considers the total amount spent on a good or service, not just out-of-pocket expenses (like with healthcare in the CPI).

Decoding the Discrepancies: Why CPI and PCE Can Differ

While both CPI and PCE aim to capture inflation, there can be slight variations in their readings due to several factors:

Scope: As mentioned, the CPI focuses on urban consumers, while the PCE encompasses all households. This can lead to differences in how price changes are weighted. For example, if the cost of gasoline rises significantly, the CPI might reflect a sharper increase as urban consumers rely more on public transportation alternatives.

Measurement: CPI uses a fixed basket of goods and services, updated periodically. The PCE, however, allows for adjustments based on changing consumption patterns. This can lead to discrepancies if consumer preferences shift rapidly.

Taxes: The CPI includes the impact of sales and excise taxes, while the PCE removes them to isolate the pure price changes.

Which Metric Matters More? The Federal Reserve Weighs In

The Federal Reserve, the central bank responsible for maintaining price stability, primarily uses the PCE price index to gauge inflation. This is because the PCE more closely aligns with the Fed's target inflation rate of 2%. However, the Fed closely monitors both CPI and PCE to get a comprehensive picture of price pressures in the economy.

Navigating the Numbers: Implications for Consumers and Investors

Understanding the nuances between CPI and PCE inflation can empower individuals to make informed financial decisions. Here's how:

Consumers: If you're budgeting for groceries or gas, the CPI might offer a more immediate reflection of your personal spending experience.

Investors: For broader economic insights and anticipating potential interest rate adjustments by the Fed, the PCE might be a more relevant metric.

The Road Ahead: Inflation in a Changing Landscape

Both CPI and PCE inflation are critical tools for understanding the economic climate. As the world grapples with supply chain disruptions, geopolitical tensions, and evolving consumer behavior, accurate inflation measurement becomes even more important. By recognizing the strengths and limitations of each index, individuals can better assess the impact of rising prices on their wallets and navigate the ever-changing economic landscape.

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Risk Warnings and Disclaimers

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Alex

Central Bank

Economic

IG Metall, Germany’s largest labor union representing workers in the auto, metal, and electric parts industries, announced today it is seeking wage increases of 7% for a period of 12 months for its 3.9 million members, when it begins negotiating with the companies whose workers it represents. The wage increases are to make up for the effects of inflation that household have had to endure. And this is now a broad trend: to make up for the effects of inflation in 2022 and 2023, wages need to be raised. And by a lot.

And so, just out today: In the 20-country Euro Area, wages and salaries jumped by 5.3% year-over-year in Q1, matching the record of Q4 2022, according to Eurostat today. And this wage growth came even as economic growth has been just a hair above zero for a year-and-a-half, except in Q4 when it dipped below zero.

In Germany, where economic growth has been near-zero for two years, wages and salaries jumped by 6.3% year-over-year, in the Netherlands, by 7.6%, in Austria by 9.8%, in Greece by 7.9%, in Portugal by 6.3%, in Spain by 4.5%. On the low side were France (+2.6%) and Italy (+3.3%).

Hot Wage Growth Bedevils Wishlist for ECB Rate Cuts_1

This data came out 11 days after the ECB cut its policy rates by 25 basis points on June 6. Lots of observers, used to seeing 0% and negative ECB rates, had hoped that this rate cut would unleash a long series of rate cuts.

But wage increases figured in the “upside risks” to the ECB’s inflation outlook and have been on the public worry list of the ECB for a while. The rate-cut announcement came decorated with a lot of hawkish comments, such as “domestic price pressures remain strong as wage growth is elevated.”

The ECB has its own measure of wage increases, based on collective bargaining agreements after they were negotiated between employers and organizations that represent workers. These are wage increases that are going to be implemented soon, so a forward-looking measure. Negotiated wages cover about two-thirds of the Euro Area economy. These “negotiated wages” exclude bonuses, overtime, and other individual compensation that is not linked to collective bargaining.

In Q1, “negotiated wages” jumped by 4.7% year-over-year, matching the Euro Area record of Q3 2023: Hot Wage Growth Bedevils Wishlist for ECB Rate Cuts_2

Big increases of wages and salaries are great for households; they have more spending money, and they feel better, and so they spend more, creating more demand and more jobs, and more economic growth, and that’s great.

Big wage increases also add to the fuel that keeps inflation going, through higher demand for goods and services, and through higher labor costs for enterprises to provide these goods and services.

Inflation dropped sharply in the Euro Area, with core CPI hitting 2.7% year-over-year in April. But in May, core CPI re-accelerated to 2.9%. The ECB’s inflation target is 2%.

The wage increases are sorely needed to allow workers to catch up with their purchasing power after the inflation spike in 2022 and 2023. At the same time, wage increases are one of the factors that fuel inflation further after it has taken off, which is why inflation is so hard to get rid of.

Source：wolfstreet

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Alex

Economic

Gross domestic product increased 0.1% in the first quarter, according to the median estimate of 16 economists surveyed by Bloomberg News. Three respondents — all from local banks — forecast a contraction and two tip zero growth. The report is due June 20.

New Zealand Economy Seen Exiting Recession by a Whisker_1

The Reserve Bank, which forecasts 0.2% growth for the quarter, has kept monetary policy restrictive to curb demand and get inflation back under control. While consumers have reduced spending and hiring has slowed, the economy may have been able to eke out a slight expansion due to a tourism recovery and record immigration that has swelled the population.

“The pull back in GDP has been neither unexpected nor unwanted from the perspective of the Reserve Bank,” said Kelly Eckhold, chief New Zealand economist at Westpac in Auckland. “But it is nonetheless jarring for businesses and households not used to such prolonged periods of stagnant economic activity.”

Subdued Outlook

The economy has contracted in four of the last five quarters, and even if it exited recession in the three months through March, latest data suggest it will remain subdued for some time.

Consumer confidence has slumped this year while businesses are increasingly pessimistic about sales and profits. The services sector — which makes up two thirds of GDP — in its deepest contraction in nearly three years, home-building approvals are at five-year lows and job ads are down 30% from a year earlier.

The manufacturing sector has been in contraction for 15 straight months.

“Looking at the latest run of information, it is difficult to deny the direction of risk to growth,” said Doug Steel, senior economist at Bank of New Zealand. “A lot of the weakness had elements of softer demand. This increases the chance that the RBNZ may see softer growth as more disinflationary than was the case previously.”

The RBNZ has so far maintained a hawkish stance, keeping the Official Cash Rate at 5.5% in the face of sticky domestic inflation. Last month, the central bank projected it wouldn’t start reducing rates until the third quarter of 2025.

Most economists expect policymakers will cut rates in the fourth quarter this year, although several don’t see an easing starting until next year.

The first-quarter GDP report may bolster the case for rate cuts to start sooner than the RBNZ’s latest projections imply, said Miles Workman, senior economist at ANZ Bank in Wellington.

“The data are expected to provide further confirmation that underlying economic momentum is weak and consistent with continued disinflation,” he said. “While growth is expected to find a floor this year, it is expected to remain sub-par for a while yet. This backdrop is consistent with the RBNZ cutting the OCR sooner than signaled in May.”

Source:Bloomberg

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Samantha Luan

Economic

Stocks

The S&P 500 climbed 0.8% to top its all-time high set on Thursday. The Dow Jones Industrial Average gained 188 points, or 0.5%, while the Nasdaq composite added 1% to its own record.

Autodesk jumped 6.5% for one of the market’s biggest gains after an investment firm said it will try to delay the software company’s annual meeting so it can nominate new directors for the board. Starboard Value also outlined how it says Autodesk hasn’t performed as well financially as it should have. In response, Autodesk said it will review Starboard’s suggestions but added that it has “a clear strategy that is working.”

Close behind Autodesk was chip company Broadcom, which rose 5.4% to add to gains from last week after it reported better profit than expected and said it would undergo a 10-for-one stock split to make its price more affordable. Broadcom followed Nvidia, the company that’s become the poster child of Wall Street’s frenzy around artificial-intelligence technology and just executed a similar split.

Broadcom was one of the strongest forces pushing the S&P 500 upward, along with a 2% rise for Apple and 1.2% climb for Microsoft.

Continued momentum for Big Tech stocks, along with easing pressure on inflation, has investors “cheering the ‘glass half full’ outlook” instead of focusing on the struggles of lower- and middle-income Americans and other challenges, according to Anthony Saglimbene, chief market strategist at Ameriprise.

Super Micro Computer, which sells server and storage systems used in artificial intelligence and other computing, leaped 5.1% to bring its gain for the year so far to a staggering 212.2%. It’s also part of the supernova around AI that’s been overshadowing almost everything else on Wall Street.

The gains for tech helped offset pressure on the stock market caused by rising Treasury yields in the bond market. The climb in yields erased some of the slack created last week when better-than-expected reports on inflation raised hopes that the Federal Reserve will cut interest rates later this year.

This upcoming week has few top-tier economic reports for the United States, outside of Tuesday’s update on how much customers are spending at U.S. retailers and Friday’s preliminary look at the state of U.S. business activity. Markets will also be closed Wednesday for the Juneteenth holiday.

A report on Monday said manufacturing in New York state is still contracting, though not by as much as economists expected. Manufacturing has been one of the areas hardest hit by the Federal Reserve’s zeal to keep its main interest rate at the highest level in more than two decades.

The Fed is trying to hold rates high for long enough to slow the economy and snuff out high inflation, but it wants to cut rates and reverse the momentum before the slowdown evolves into a painful recession.

High interest rates hurt all kinds of investments, and they tend to hit some areas particularly hard. Utilities in the S&P 500 fell 1.1% for Monday’s largest loss among the 11 sectors that make up the index. They often get hurt when bonds are paying more in interest and drawing away income-seeking investors who would otherwise gravitate to dividend-paying utility stocks.

GameStop was another laggard and fell 12.1% following its annual shareholder meeting. The stock has been soaring and sinking as it rides waves of enthusiasm by smaller-pocketed investors. At the meeting, CEO Ryan Cohen said the struggling video game retailer will focus on cutting costs, which would involve a “smaller network of stores.”

All told, the S&P 500 rose 41.63 points to 5,473.23. The Dow gained 188.94 to 38,778.10, and the Nasdaq composite jumped 168.14 to 17,857.02.

In the bond market, the yield on the 10-year Treasury climbed to 4.28% from 4.22% late Friday. The two-year Treasury yield, which more closely tracks expectations for the Fed, rose to 4.76% from 4.71%.

In stock markets abroad, European indexes calmed somewhat following last week’s rout. France’s CAC 40 rose 0.9% following its worst week in two years on worries that potential electroal losses by the president’s centrist party could lead to sharply higher debt for the country.

The modest gains for Europe followed losses in Asia. Japan’s Nikkei 225 dropped 1.8%.

Source:AP

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Alex

Economic

Malaysia’s retail sector recorded a better-than-expected growth rate of 7.8 per cent in retail sales, as compared to the same period in 2023, according to the latest report from Retail Group Malaysia (RGM) released today.

It said members of Malaysia Retailers Association (MRA) and Malaysia Retail Chain Association (MRCA) had projected the third quarter growth at 1.7 per cent.

The robust growth was fuelled by various factors including the Chinese New Year festivities, extended school holidays from February to March, and the beginning of Ramadan on March 12.

These events boosted consumer spending, alongside the distribution of Sumbangan Tunai Rahmah (STR) Phase 1 to 8.2 million Malaysians and increased tourist arrivals attracted by favourable exchange rates and visa-free entry for Chinese visitors.

However, challenges persisted due to rising food prices and global geopolitical tensions, which led to boycotts of certain international brands, affecting market dynamics.

Economically, Malaysia saw a 4.2 per cent growth overall in the first quarter, with retail sales climbing by 7.8 per cent.

This growth was supported by strong consumer spending, increased investments, a stable labour market, and a rise in tourist numbers.

Key sectors such as services and construction expanded by 4.7 per cent and 11.9 per cent respectively, while inflation averaged 1.7 per cent, driven mainly by higher costs for dining out and utilities.

In March alone, dining out expenses rose by 3.5 per cent, and costs for restaurants, accommodation services, housing, and utilities increased by 3.0 per cent.

Private consumption grew by 4.7 per cent during the quarter, driven by sustained spending on both essential and discretionary items.

Despite these positive indicators, consumer sentiment – as measured by the Consumer Sentiment Index by the Malaysian Institute of Economic Research – dipped to 87.1 points in the first quarter due to concerns over rising living costs and future job prospects.

Unemployment rate held steady at 3.3 per cent, with labour force participation reaching a record high of 70.2 per cent.

The performance across retail sub-sectors varied significantly during the period as department stores combined with supermarkets saw a robust growth of 12.3 per cent, while standalone department stores recorded a 9.7 per cent increase.

Supermarkets and hypermarkets grew by 2.0 per cent, and mini markets, convenience stores, and cooperatives expanded by 5.6 per cent.

Fashion and fashion accessories led the charge with a 12.6 per cent growth, while children and baby products saw a 4.8 per cent increase and pharmacies grew by 8.2 per cent.

Personal care products grew by only 0.4 per cent, and furniture & furnishings, home improvement, and electrical & electronics declined by 2.1 per cent.

Other specialty stores, however, achieved a growth of 4.6 per cent.

The food and beverage (F&B) sector continued to perform well in the first quarter of 2024, driven by festive celebrations and school holidays.

However, higher food prices increased costs for F&B operators as the ongoing Israel-Palestine conflict led to boycotts of certain international F&B franchises, affecting their operations.

F&B outlets, including cafes and restaurants, grew by 7.4 per cent while take-away outlets saw a 9.7 per cent increase.

This boycott is expected to continue in the medium term, impacting business operations.

Looking ahead, cafe and restaurant operators anticipate a 7.3 per cent growth in sales for the upcoming quarter, while food and beverage kiosks and stalls foresee a slower 5.5 per cent increase.

RGM initially projected a 4.0 per cent growth in retail sales for the full year of 2024 but later revised this down to 3.6 per cent, citing a strong first quarter and moderate expectations for the second quarter.

It said the primary challenge for Malaysia’s retail sector remains the escalating cost of living affecting consumers across all income brackets.

RGM added that the depreciation of the Malaysian currency continues to impact businesses dealing in imports, leading to higher prices for consumers.

Since January 1, a 10 per cent sales tax on online sales of imported goods has contributed to the uptick in retail prices.

Additionally, the service tax rate on many goods and services rose from 6.0 per cent to 8.0 per cent starting March 1, influencing retail expenditure.

The service tax on monthly electricity bills exceeding RM220.00 increased to 8 per cent from the same date.

In April, the introduction of EPF’s flexible Account 3 allowed members under 55 to withdraw funds, resulting in RM8.78 billion in applications by May 22, likely bolstering retail spending.

Moreover, the government’s decision to float diesel prices and initiate a subsidy program from June 10 could impact transportation costs and retail prices.

The planned High-Value Goods Tax (HVGT) has been postponed indefinitely, while tourism has shown signs of recovery with targeted arrivals of 27.3 million tourists and receipts amounting to RM102.7 billion for 2024.

With civil servant salaries set to increase by over 13 per cent from December 1, with a minimum salary rise to RM2,000 per month, year-end retail sales are expected to receive a significant boost.

RGM projects a 2.5 per cent growth in the retail sector for the third quarter and aims for a 3.2 per cent increase in the fourth quarter following last year's subdued performance.

Source:Malaymail

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Cohen

Economic

Stocks

India’s stock market value exceeded $5 trillion for the first time, with the latest boost coming from a commitment by Prime Minister Narendra Modi’s new coalition for policy continuity in the world’s fastest-growing major economy.

The country’s equity market has joined the ranks of the US, China, Japan and Hong Kong after topping the threshold last week, according to data compiled by Bloomberg. It took India about six months to add the latest $1 trillion to the capitalization of companies listed on its exchanges.

Indian stocks have been scaling new peaks since the ruling Bharatiya Janata Party secured sufficient support from key allies to form a coalition government, ensuring Modi’s return to power for a third straight term. The victory, alongside robust economic growth and a recent upgrade of India’s ratings outlook by S&P Global Ratings, are combining to burnish India’s appeal for global investors.

The formation of the new government with most key ministers retaining their portfolios “broadly affirms policy continuity,” according to Goldman Sachs strategist Sunil Koul. India remains a market with exceptionally stable macroeconomics and earnings growth is expected to continue, driving stocks higher, Koul said in a Bloomberg Television interview last week. India’s Stock Value Tops $5 Trillion as Modi’s Win Powers Rally_1

India’s Stock Value Tops $5 Trillion as Modi’s Win Powers Rally_1

A distinctive feature of gains in recent years has been the extent to which millions of young Indians have taken to equity investments. Local funds, including banks and insurers, have bought more than $26 billion in shares this year, while foreigners offloaded about $3.4 billion, according to data compiled by Bloomberg.

“The once dominant foreign institutional investors are no longer the sole drivers of the market,” according to Bino Pathiparampil, head of research at Mumbai-based Elara Capital.

Still, off-shore interest have started to return following the outcome of the elections.

“There appears ample money on the sidelines waiting to be deployed into India from foreign regional funds and India dedicated funds,” said Chetan Seth, a strategist at Nomura Holdings Inc. “Foreigners have not been able to get enough of India largely due to concerns around valuations and are still underweight.”

India’s benchmark NSE Nifty 50 Index closed at a fresh all-time high on Friday and is headed for an unprecedented ninth-straight year of gains. The shares of smaller and mid-sized companies have also been rallying and outperformed their larger peers in recent years to account for about 40% of the total market valuation. The market was closed on Monday for a public holiday India’s Stock Value Tops $5 Trillion as Modi’s Win Powers Rally_2

India’s Stock Value Tops $5 Trillion as Modi’s Win Powers Rally_2

Source:Bloomberg

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FastBull Featured

Daily News

[Quick Facts]

1. Fed's Harker sees one rate cut appropriate this year.

2. Israeli PM Netanyahu has dissolved the war cabinet.

3. Three U.S. stock giants account for 10% of global market cap.

4. A 39% probability that the Fed will keep rates unchanged in Sept.

[News Details]

Fed's Harker sees one rate cut appropriate this year

While last week's Consumer Price Index reading was "very welcome," progress on inflation so far this year has been modest, Philadelphia Fed President Patrick Harker said on Monday. He needs to analyze more data over the coming months in order to take a decision given the overall choppiness.

Harker, however, did not rule out changing his view on rates as more economic data is parsed. He sees slowing but above-trend economic growth, a modest rise in the unemployment rate, and a "long glide" back to target for inflation as his base case. If all of it happens to be as forecast, he thinks one rate cut would be appropriate by year's end, but he sees two cuts, or none, for this year as quite possible.

Israeli PM Netanyahu has dissolved the war cabinet

On June 17, local time, Israeli Prime Minister Benjamin Netanyahu announced that the war cabinet had been dissolved, following the withdrawal of his principal rival, Benny Gantz, the leader of the "National Unity Party". There is a comment that this will intensify the contradiction and disagreement within the Israeli wart cabinet. With new members calling to join, a more extreme wart cabinet could emerge.

Three U.S. stock giants account for 10% of global market cap

After the market capitalization of Microsoft, Apple and Nvidia surpassed $3 trillion, these three companies accounted for more than 20% of the S&P 500 index, according to data from Strategas. The influence of U.S. stocks is expanding globally, with a market capitalization of more than 60% of global markets. Howard Silverblatt, Senior Index Analyst for S&P Dow Jones Indices found that these three U.S. stock giants have accounted for 10.6% of global market capitalization, which is unprecedented in history.

A 39% probability that the Fed will keep rates unchanged in Sept

According to the CME FedWatch Tool, the probability of the Federal Reserve keeping interest rates unchanged in August is 90.7%, and the probability of a 25 basis point cut is 9.3%. The probability that the Fed will leave interest rates unchanged in September is 39%, the probability of total 25bp cuts is 55.7%, and the probability of total 50bp cuts is 5.3%.