The Fed's favorite inflation metric

plus a look at disposable income and savings rates

The Personal Consumption Expenditures (PCE) index got posted this morning at 10.9% year-over-year. That is hot! Here’s the chart:

The good news is that it is trending down. The bad news is ‘core’ PCE is on fire.

As a reminder, the ‘core’ figures tease out the food and energy costs. This is an underhanded way to figure inflation (who can go without food and gas?). It’s a tradition passed down since Arthur Burns tweaked the CPI when he was at the Fed. It’s also screaming higher.

If you remember, back in August Jerome Powell had a presentation that included a slide that he used when talking about inflation. It used total PCE, core PCE, and trimmed mean PCE.

At the time I pointed out that his slide was based on an 18-month percent change. It was curious to me at the time because you could only do an year-over-year comparison through the Federal Reserve’s FRED website.

At the time, I openly wondered if the Fed modified their preferred inflation tracker to moderate the change in inflation. I imagine their hope was that this inflation was transitory and would calm back down. However, it has not. Here’s the Fed’s preferred inflation tracker at the 18-month percentage change rate.

This should have them rightfully fearful that they have overshot their inflation target. By any metric they use, inflation is running hot. The only way to stop it is to raise interest rates. However, that is politically unacceptable at this current junction. Powell is seeking another term as Fed chairman, so he wants to keep the Dems happy. If he were to raise interest rates to squash inflation, it would crush the markets. Midterms would be catastrophic for the Democrat party. Raising interest rates now we be a sure way to NOT get re-appointed chairman. So what’s a guy to do? Play the same song and dance and try to talk down the inflation. I’ll be very interested to hear what comes out of the Fed’s meeting next week.

Earlier this year, Bank of America made much-ado-about-nothing when they honed in on the big hoard of cash that had gotten parked at the banks. They pontificated that these deposits were poised to come into the economy as soon as a “sunny-day” came along. They toyed with this idea for several months but we still have not seen this money come into play.

What we are starting to see is savings rates and disposable income coming crashing down.

This means consumers are opening up their wallets and spending. The economy is catching fire. All inflation metrics (including the Fed’s 18-mo core PCE) are burning hot. Commodities are pushing up to new highs and I expect gold’s move will come next. On November 3rd, the FOMC meeting will end with a press conference. Expect the announcement of the taper and a wild day on Wall Street.

Also, those that had call options on Ramaco, your party is calling.

It finished up nearly 17% on the day. WOW.