Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today, we hear from the Fed's favorite measure of inflation and get the latest on pending home sales.
Core PCE Up 0.4% in January
For our new readers out there, we’re talking about the core personal consumption expenditures price index. This—and not the consumer price index—is the Federal Reserve’s preferred measure of inflation for two reasons:
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Core PCE is based on what consumers actually spend, not just price changes like the CPI does.
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By using “Core” PCE, food and energy data are removed as their prices can be volatile. This gives us more stable data on spending.
For those of you who need to know more about the differences between CPI and PCE, here’s a good WSJ article on the subject.
Now that we got that out of the way, The Fed’s preferred measure of inflation rose 0.4% in January, and was 2.8% higher than a year ago. Remember that the Fed’s goal is a 2% annual rate of growth for Core PCE, so they’ve still got some work to do. Both these figures matched the Dow Jones consensus estimates, so no surprise here.
While total personal consumption expenditures—not just prices—rose 0.2%, that gain is due solely to price increases. Adjusted for inflation, personal consumption expenditures fell 0.1% in January. Another case of consumers spending more money on less stuff.
Also of note was a 1% increase in personal income in January, which was much higher than expected. A 3.2% increase in the cost-of-living adjustment to social security was the main driver of that increase.
So, to sum up:
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The Fed’s favorite inflation gauge came in as expected in January.
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Personal income rose sharply, but that was due to increased social security payments.
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Consumers spent more than the prior month but got less for their money.
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This report will have no impact on what the Fed does at its March meeting, as they are committed to holding rates steady for now.
Pending Home Sales Down 5%
Pending home sales—which measure contract activity and not closings—fell 4.9% in January. The reasons for this decline are all too familiar to us: very low inventory combined with rising mortgage rates.
But Greg, didn’t you say in last week’s column that existing home sales rose in January?
I did, and thanks for reading. Existing home sales are measured when the closing occurs, while pending sales haven’t closed yet and are counted when the contract is signed. So existing sales are the past, while pending sales are the future.
So, the decline in pending sales to start 2024 isn’t good news for the housing market, but things can change quickly. All we need is a decline in mortgage rates, more inventory, or both. If only it were that simple!
I do believe we will see both happen this year, it will just take time. That said, did I forget to point out that mortgage rates just rose for the fourth-straight week? Oh well, let’s just pretend I didn’t say that.