PCE and the misconception on deflation….The week ahead

Last Friday, 8/28, we got July PCE data. As usual people ran wild with the easy to read headline prints which showed small month over month gains in the broad indices. However, when one takes a look at the many tables that the BEA provides, we can see that there are significant gains across many line items. It’s really become quite scary how so many people in financial media do almost no research on the data. These numbers don’t lie. Yet we still have people saying there is no inflation and that the US is in danger of deflation. People just like a catchy, easy to use headline to drive clicks I guess. What we can derive from this latest PCE report is that consumption is up and price levels are rising. Period. *Data below is taken from NIPA Table 2.3.1

PCE 8.29.15

Bottom line..PCE, CPI and employment data all give the Fed the green light to go in September. Comments from VC Fischer this weekend confirmed the fact that while the Fed recognizes foreign economies, those situations will not dictate Fed policy.

We can thank the rise in consumption to :

1. Jobs

2. Low energy prices.

Going back to one of my underlying arguments for consumption and why deflation is not a threat is basic human tendency to consume. When people have job security and money, we buy things. When items that we to like buy have gone down in price, we tend to buy more. I posed this question recently to my girlfriend on how she reacts to items she likes being on sale…She unequivocally buys more. While all this is really just common sense, it still for some reason eludes many economists. I can only conclude that It must be the common sense component.

Here we are on Tuesday morning with equity markets in turmoil again. This time last week we were staring into the abyss again and look how that turned out. A face ripping equity rally. To help things, we just got an encouraging labor report out of Europe that has unemployment falling to a 3.5 year low..Only problem is, the aggregate level is still double digits. In the US, we do have significant manufacturing and services data coming out this week along with the holy grail of economic reports: August non-farm payrolls. Weekly claims data would have us headed for another 200K+ print, but I’m reserving my prediction to see what the employment components are of our PMI and ISM reports. So get ready for another volatile week…

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