Core inflation clocks in at highest rate since 1992

Brian Cheung joins Brian Sozzi and Julie Hyman to break down data from the Bureau of Economic Analysts and the Fed comments on monetary policy as the market continues to question the transitory nature of inflation.

Video Transcript

JULIE HYMAN: But we do begin this morning with inflation numbers, as well as Fedspeak that we have gotten, as well as the Fed stress test, a lot to cover on the Federal Reserve front. When it comes to inflation numbers this morning, we got the so-called PCE deflator, which is commonly cited as the favored measure of inflation by the Fed. Now it was pretty hot, but it was also in line with estimates. And our Brian Cheung is here to break down the numbers for us. Brian.

BRIAN CHEUNG: Well, Julie, as you mentioned, earlier this morning we did get data from the Bureau of Economic Analysis with some spending and income data. First on the personal income side of things, the Bureau of Economic Analysis saying that in the month of May personal income declined by 2%. Now of course, this is after a March where we saw personal income really expand, a lot of that due to the stimulus checks that were doled out by the Biden administration, so not necessarily a surprise in May to see some of that income going back down on a month-over-month basis.

But of course, everyone watching the inflationary data, whether or not the pressures are happening on prices, and the answer does appear to be yes. When you look at the month-over-month figure for the personal consumption expenditures index, this is a major metric that policymakers look at when it comes to inflationary data, that came in at 0.4% change month-over-month. That was actually a little bit lower than estimates from the Street of 0.5%. When you measure it on a year-over-year basis, that figure is quite large at 3.9%. That was what the Street was estimating, again, at 3.9%.

But of course, you also want to strip out some of those more volatile components like food and energy. This is one preferred way that the Fed likes to look at PCE. When you look at these so-called core PC when you do strip out those elements, you get month-over-month change of 0.5%. That was also below the Street's estimate of 0.6%. And then on a year-over-year basis prices increased by 3.4% on core PCE.

Keep in mind the Fed's target is at 2%. And that 3.4% year-over-year print is, by the way, the fastest that we've seen inflation grow on a year-over-year basis since 1992, before I was even born. So it's been a while since we've seen an inflationary print quite this high.

And then one last point I want to bring up is that, of course, a year-over-year comparison is a little bit tricky when you consider that the April and May months of 2020 were some of the deepest losses in terms of the PCE index itself. So when you look at a year-over-year comparison, of course, those metrics will be higher. This is what they call base effect, something that the Federal Reserve will obviously be using as a crutch to say this is transitory. But of course, some of those effects are expected to fall out in coming months, guys.

JULIE HYMAN: And also, Brian, we got not just the PCE consumption expenditure deflator, da, da, da, we got actual consumer spending also. And those numbers-- I mean, they've been cooling down a little bit as we've had stimulus checks run out. We also have this sort of rotation to services spending from goods spending to some degree. How did you read those numbers?

BRIAN CHEUNG: Yeah, well, when you take a look at consumer spending numbers, of course we have to understand that a lot of this is in the context of two factors. First of all, just the high number of people going out and spending with the economy reopening. And then secondly with, again, the stimulus checks and the unemployment insurance that continue to be doled out.

We got that last round earlier in the spring, and that unemployment insurance, that extra benefit, will be continuing through the rest of this summer. Now, those will be expiring in the fall. So when it comes to consumer spending, it seems like it's a function of not only people going out as the economy reopens, but also just better summer weather as people go on vacation, which explains a lot of the consumer spending data that we've been getting.

But of course, when you're looking at income kind of flattening out, given the top-line number that we saw with a 2% month-over-month decrease in the month of May as the BEA said this morning, there is definitely a question of whether or not that can be sustained, which, again, is part of that argument, that debate about whether or not those inflationary pressures which we're seeing right now, which categorically are high, will be lasting through the end of 2021. We have to remember that the Federal Reserve's estimate for where personal consumption expenditures will be is around the 3% range, but they do expect that to come back down to close to 2.1% next year.

BRIAN SOZZI: Brian, if you're one of the four Fed members speaking today and you saw this inflation print, are you going back to your notes and crossing things out and changing up your language?

BRIAN CHEUNG: I don't think so, because the idea with inflation is that it's all about trying to figure out how much of this is transitory because of the factors that I just listed, in addition to supply chain constraints, which we know is definitely the case in spaces like microchips and spaces like lumber as of earlier in the summer. Now of course, it's going to take more than just one month of data to be able to draw a sharp conclusion about whether or not it's going to be transitory or more persistent.

Now of course, what we have seen is a trend upwards. We had that chart ahead of you that showed the line graph that's really showed the PCE figure on a year-over-year basis continuing to rise. So first of all, will that ever stop?

And then secondly, will that ever come back down? That would obviously take a few more points of data to determine. But of course, I want to just offer, as a quick plug, that we will have the Boston Fed President Eric Rosengren on our program later today at 2:15, and we'll be asking him directly about that question.

JULIE HYMAN: And just really quick here, Brian, we also had the Fed stress test. That means the banks are going to be allowed to return capital to shareholders now.

BRIAN CHEUNG: Yeah, very quickly. So 23 large banks tested by the Federal Reserve in this year's stress test cycle, they were all cleared with a clean bill of health, and they all apparently had strong capital levels, as the Fed described. That means that they have the green light to distribute dividends and buybacks in a way that they weren't restricted to because the Fed put in some COVID-era restrictions on that. They wanted to preserve the bank capital. But with that clean bill of health to those 23 largest banks, they'll be able to dole out shareholders whatever they want in terms of dividends and buybacks barring a rate [AUDIO OUT] which would be a strong windfall for those stock investors, guys.

JULIE HYMAN: Thank you, Brian Cheung. Appreciate it.