Just last week the U.S. Bureau of Economic Analysis announced another stark increase in inflation measures for the month of November. In fact, the annual inflation rate just hit 2.8%. This figure has increased from 2.7% last month. It gives a glimpse of the future because it confirms the continuing trends in personal income and consumer spending. Taking a closer month-to-month look, personal income was up just 0.3% in November, with personal spending up a much stronger 0.5%.
We track the increase in inflation using the PCE Price Index. This Consumer Price Index measures the change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The overall PCE Price Index increased by 0.2% MoM. This one month jump is part of the trend line inflation that all the economists have been on high alert for.
Understanding Core Inflation
Economists like to look at core inflation, removing the most volatile items from the index, like food and energy prices. This measure offers a less noisy, albeit lagging, indicator of long-term inflation trends. Central banks, including the Federal Reserve, aim to maintain core inflation around a target rate of approximately 2%. If core inflation goes above this level, central banks typically respond by increasing interest rates. Their only response is to raise interest rates.
When core inflation falls below 2%, core central banks sometimes back off their aggressive interest rate policies in monetary tightening. They take this action to promote economic development. As of November, the core PCE inflation was at 2.8%. Against this backdrop, the new advances also serve to put the Fed’s policies under a microscope as they walk through these economic minefields.
Impact on Personal Income and Spending
That combined with a reported month-over-month personal income increase of 0.3% in November means that consumers are making and slightly spending more. This modest increase can have a tangible impact on their purchasing behaviors. In lockstep, personal consumption expenditures jumped 0.5%, showing that consumers are undeterred from spending even as prices are increasing. This counter-intuitive relationship between income and spending is incredibly important, as we know increased consumer spending can in-turn drive further economic growth.
Even amid higher inflation, consumers are still making purchases and purchasing more actively than before. We hope that this deep and sustained engagement will help create the economic landscape we envision. The continued strength in consumer outlays could be a cause for worry about future inflationary pressures.
Market Reactions and Economic Outlook
The impact of the June inflation data saw the USD Index fall sharply. It dropped 0.25%, to 98.55, on the day that report was released. Market analysts pay extraordinary attention to the dollar index as a reliable barometer of investor confidence in the economy. This is becoming increasingly important as inflation averages climb day-by-day.
As central banks assess these economic indicators, they face the challenge of balancing interest rates to promote growth while controlling inflation. The figures for November are sure to have a big impact on how future monetary policy will go, especially with regards to interest rates.