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Inflation: Fed’s preferred measure holds steady at 6.3% in May

Yahoo Finance Live anchors discuss May PCE inflation.

Video Transcript

BRIAN SOZZI: All right, now, here are three things you need to know right now. We just got a fresh read on inflation and the economy in the PCE numbers. PCE came in slightly under estimates at 6.3%. Core PCE also showing a drop from last month at 4.7%.

Let's bring in Yahoo Finance's Brian Cheung on this. Brian, I thought at first glance, just given the deceleration, a bit in inflation, you would have saw the markets pop a little bit. Not what we're seeing here.

BRIAN CHEUNG: No, not at all. And I think that what's interesting is that if you look at these PCE numbers, it tells you a little bit of a different story than the May figures on the CPI, the other measure of inflation. But again, rehashing the numbers, PCE on a year-over-year basis coming in at 6.3%. The Street had expected 6.4%.

When you strip out those more volatile components-- we know that energy, right, has been a big contributor to overall inflation-- it's still at a relatively elevated 4.7% on a year-over-year basis, but again, missing the Street's estimates. They expected 4.8%. Now, the Federal Reserve is not going to look at a 0.1% difference and say, look, mission accomplished. These are still relatively high levels when you consider the Fed's target is 2% on inflation.

But the big reason, energy prices up 36% year-over-year. You're seeing housing, health care, International travel, interestingly noted in the document, as a reason for high inflation. And then goods, we did see a decrease in motor vehicles and parts, but energy essentially offsetting all of that.

- And so the difference between PCE and CPI, just help us wrap our heads around that and why, in a time like this, there could be that difference, perhaps.

BRIAN CHEUNG: Yeah, well, I mean, because people might be saying, what, 6.3% inflation? I thought it was something like 8%. Well, that's because of the other reading, the Consumer Price Index, which actually is a little bit of a faster release than the BEA. This is, by the way, May data, not June data. So this is a bit dated.

But when you're looking at the difference here, we have to remember that there are different types of methodologies for collecting this data. So when we take a look at the CPI, which you see on the chart ahead of you, again, 8.6% was the number that we had last gotten. The CPI does, they don't do substitution effects. So when you take a look at the PCE, for example, that's going to account for, well, if people have reasons to no longer buy pork because it's getting more expensive, then maybe they'll start to buy, they'll start to buy more chicken.

The PCE will actually adjust the weightings of those categories to account for that substitution effect. The CPI does not do that. That's one reason why the Fed prefers to look at PCE, because they find that a bit more adaptable of an index to look at.

And then another difference is when we take a look at airline fares, for example, right, that's a big factor in high inflation, because airline prices have gone up. We've all seen that when you search for fares online. What the PCE does is it looks at per mile, the cost per mile for where you're traveling, right, whereas the CPI will take a look at, let's say, for example, a sample route, JFK to LAX. Same route, what's the difference in that airfare ticket?

So it's different methodology. Tough to say which one is better. But in case anyone's wondering why it's a whole 2% spread, that's the reason.

JULIE HYMAN: So put a different way, where CPI looks at the prices that are being charged, the PCE tries to adapt more to what people are actually paying as they adjust their spending patterns, perhaps based in part on pricing?

BRIAN CHEUNG: Well, I would say that's more accurate if you're looking at, for example, the PPI, the Producer Price Index, although to your point, there is some methodological differences in terms of, I think, health care as well, because when you think about, well, there's a difference between what the medical provider is being billed versus what the actual person who's being billed because of insurance. So there is some difference there that actually does show what the person is paying is a little bit different.

JULIE HYMAN: And the conventional wisdom is always that the Fed is more looking at PCE. Is that still true, though? Because the CPI really seemed to throw them off last time.

BRIAN CHEUNG: Well, Fed Chair Jay Powell has said this is not a time for tremendously nuanced readings of inflation. The Fed's preferred measure is PCE. But look, even though this came in a little bit lighter than what the Street was expecting, and it actually, by the way, 6.3% year-over-year, that's the same pace as we had seen in April. So maybe a quick reading would say this is a plateauing, not a peak, but a plateauing, perhaps.

JULIE HYMAN: Stabilizing.

BRIAN CHEUNG: Right. But the Fed is going to say, OK, well, that's one reading of inflation. But the other reading of inflation is showing that it's still going up. So if you want to average the two of those out, the story is still that inflation has not peaked yet. But maybe you're looking at some green shoots. Again, the decrease in motor vehicles and parts, that shows perhaps less demand for durable goods.

Personal saving rate, I want to highlight, actually increased between April and May, 5.4% instead of 4.4%. Again it's, not-- it's still historically very low. But when you take a look at maybe consumer behavior, maybe they're saying now, hey, I can maybe leave a little bit more money in the bank because the inflationary story is encouraging me perhaps to not go out so much.

BRIAN SOZZI: Brian, I just want to highlight real quickly the personal spending, so up 2/10 of a percent according to this data. That was a slowdown versus April, slowdown versus the growth rate in March. Do you think that will feed the recession fears? I'm just trying to figure out why we saw this move tick lower in markets here in the premarket.

BRIAN CHEUNG: Yeah, well, I mean, the reading of it might be good for the Fed from the perspective that you're starting to see, at least from this report-- again, not all data is saying the same thing right now-- but at least from this report that perhaps you're starting to see a US consumer that's being a little bit more cautious, wanting to save a little bit more, wanting to spend a little bit less. But again, this is still really high inflation, right?

However, what that also tells you is that this pullback is perhaps that self-fulfilling prophecy of that pullback in consumer demand and economic activity that could spell-- because this, by the way, is a component of GDP-- that perhaps will get a negative, perhaps we'll get a negative print on Q2 GDP, which again, you have a negative reading for the first quarter. If you get a second negative reading on second quarter, people, some people would consider that a recession.

BRIAN SOZZI: You know what's inflationary, Brian? I spent $25 on four burritos last night. That just took me off guard.

BRIAN CHEUNG: Well, I don't know--

BRIAN SOZZI: I was shocked. I was shocked.

BRIAN CHEUNG: I don't know what location you were at. In Manhattan, perhaps.

BRIAN SOZZI: Here in New York City.

- Did you get different proteins for each one?

BRIAN SOZZI: This was Taco Bell.

BRIAN CHEUNG: Yeah, this guy, this guy loads up--

BRIAN SOZZI: It was $25.

BRIAN CHEUNG: This guy loads up on double meat all the time.

JULIE HYMAN: Wait, you eat four burritos?

BRIAN SOZZI: We have to keep this segment moving.

BRIAN CHEUNG: He had two. He had two yesterday. I confirm.

BRIAN SOZZI: We'll keep it moving.

JULIE HYMAN: OK, I was going to say--

BRIAN CHEUNG: Sources can confirm it was two.

JULIE HYMAN: --if you had four burritos, inflation of prices is not what all we're going to talk about here.

BRIAN SOZZI: It seemed a lot. It seemed a lot. It seemed a lot. It seemed like a lot.

- Resident Fed and--

BRIAN SOZZI: Over to you, Brian.

BRIAN CHEUNG: And Taco Bell. Yeah, I do.

- --expert and Taco Bell. Yeah. Resident Fed and economic expert, our own Brian Cheung, also sneakers app aficionado as well, I might add here.