From Income to Inflation: Breaking Down the February PCE Report | Episode 106 | 02-29-2024

In today's episode of Markets with Megan, Megan Horneman looks into the highly anticipated Personal Consumption Expenditure Report, breaking down crucial details on personal income, spending, and inflation. She discusses the PCE Core deflator, the Fed's preferred inflation gauge, highlighting its significance in comparison to the CPI index. Megan covers the unexpected rise in personal income, the more subdued personal spending, and the consequent increase in the personal savings rate. looking into the inflation data, where goods prices experienced deflation, but services inflation remains a concern for the Fed. Stay tuned tomorrow for updates on the market's current state. Feel free to reach out with any questions or comments at podcast at Verdence dot com.

Watch today's episode here:

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. We're coming to you today with our regular segment of Markets with Megan. It's Thursday, February 29th and this morning we got the very anticipated Personal Consumption Expenditure Report. Now this comes with a lot of different details within this data. First of all, it gives us information on personal income For the month of January. It also gives us information on personal spending, but, most importantly, it gives us information on inflation, and the PCE Core deflator is the Fed's preferred inflation gauge. Remember that the CPI reading came out hotter than expected last month. So there's been a lot of attention focused around this PCE Core because it does have a little bit of a different composition than that CPI index. So let's dig right in Personal income. On a good note, it rose more than expected in January. It was up 1% versus the expectation of it only being up 4-tenths. Personal spending that only rose 0.2%. So a little bit more subdued there. And what happens when income rises more than spending? We do see the personal savings rate increase and we did see that move higher. For the first time in three months. It's now 3.8% Now. Just to put that in perspective, the 20-year average is well above that. It's above 5%. So still some depletion here in the personal savings.

The inflation data we're going to focus on that core number because that's what the Fed's going to look at. It did increase more than expected in the month. It was the biggest jump we saw since last year at this time January of 2023. It was up 4-tenths of a percent Now on a year-over-year basis. It did moderate a bit. It was 2.9% the prior month and in January it rose 2.8% Again. Still not at that Fed's 2% inflation target, but it is moving slowly in the right direction.

Now let's dig in a little bit deeper to what's making up that inflation data. First of all, underneath of it, the goods inflation. We're still seeing goods deflation, so goods prices were down for the month in January. But if you look at services this is what the Fed's going to be a little concerned about and we've talked about this repeatedly Services is sticky. This is a sticky part of the inflation where it's going to make it difficult for the Fed to get from that 2.8% down to that 2%. And when you look at service inflation on a year-over-year basis, it's growing 3.9%. It is trending downward. It's been above 4% for many months but it's still growing well above what the Fed wants to see and this is something that's very difficult for the Fed to combat Now.

We'll be back next tomorrow. Actually, there's going to be some information the first of the month with the ISM Manufacturing Report, and that's going to be important because we've gotten some pretty dismal readings on regional manufacturing reports, some today and some more the rest of this week. That we've seen this really hasn't changed much. The market is pretty much directionalist here. People are still expecting and pricing in rate cuts as early as this summer. We're kind of on the fence there. Some of these things underlying that, what you see on the headlines and what you read in the reports is still showing some trouble for the Fed and they have to err on the side of caution. So we'll keep following this information, we'll keep updating you, we'll keep giving you our opinion and if you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you so much.