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Personal income fell 13.1% in April; Core PCE price index up 3.1% year-over-year

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Yahoo Finance’s Julie Hyman, Myles Udland, Brian Sozzi, and Brian Cheung break the latest inflation data for April.

Video Transcript

MYLES UDLAND: But let's begin this morning with the latest on the state of the US economy and the state of inflation as we continue to see a reopening, a demand boom, and supply chain bottlenecks impact production. Yahoo Finance's Brian Cheung stops by now with the latest on those PCE data, which, Brian, as I know you will illuminate for us, are the more closely watched inflation data from Fed officials.

BRIAN CHEUNG: Yeah, well, this data coming from the Bureau of Economic Analysis, the numbers dropped on the tape about 30 minutes ago. But let's unpack. First of all, personal income fell by 13.1% month-over-month in the month of April. That is quite a change from the March 2021 figure where personal income grew by 20.9%.

Now, these types of large numbers owe themselves to the stimulus check payments that were made in the month of March, so to be expected that personal income figures compared to the month-over-month figures were going to be down for the month of April. But of course, we're watching very closely on the inflationary figures. When you look at personal consumption expenditures as an index that the BEA puts together, you'll see that index grew by 3.6% in the month of April. That is continuing to rise from the figure that we saw that was already quite large for the month of March, which was 2.4%.

Now, PCE looks at an index. It's a basket of many different types of goods, and officials like to strip out the more volatile components like food and energy, which gives us the core PCE inflation, see the numbers ahead of you. 3.1% was the growth in that index for the month of April. That is continuing to rise from the 1.9% pace that we had seen in the previous month.

So when we think about inflationary figures, it is definitely the case, based off the figures that we got from the BEA this morning, that inflation is indeed rising. The question, of course, now is whether or not it's transitory or temporary, as the Federal Reserve itself has said. Obviously a lot of supply chain issues going on. But that core PCE figure is what policymakers will be watching very closely.

Their target for PCE is about 2%. So when you see these above 3% figures, this is really going to test the central bank with regards to whether or not they'll flinch to some of these inflationary pressures. If it is indeed transitory, they say, you know what, we're OK with this print. Let's continue to let the monetary policy and the easy money ride. But if at some point we get multiple months of these types of prints, if they continue to go up, maybe that tests the resolve of these Fed officials as that taper talk continues to loom, guys.

JULIE HYMAN: Yeah, I guess that'll also-- what the market does in response to the inflation numbers should also test the resolve of the Federal Reserve. When you talk to economists, Brian, how concerned are they about the magnitude of these numbers? Even if they're transitory, does the magnitude start to become a problem-- at what point-- like, is there a number threshold? Is there a-- is there a number of months that it has to stay at a certain level for them to start to get more concerned?

BRIAN CHEUNG: Well, I think when it comes to inflation, it's not necessarily about the print that we're seeing right now. A lot of it is about inflation expectations, right. On one hand, you could argue that yes, these are numbers that we haven't seen in over 10 years. In fact, we'd have to go back quite a while to get a core PCE year-over-year growth in the 3% figures.

But when you look at the Street, a lot of estimates on the Street were expecting 3% growth. And that's because of the un-- the unique nature of this bounce back with the economy reopening at a-- at a speed out of a recession that we haven't seen before. Now, when you look at inflationary worries over, let's say, for example, the next year, that's when you want to start looking at survey-based or even market-based measures of inflation. You can look at breakevens on TIPS instruments or you can look at New York Fed surveys.

But a lot of those are really noisy, because inflation expectations are very much psychological. It's a very difficult thing to pin down. I think when we talk about policy the question is, what's going to be a core PCE year-over-year growth figure that's going to concern Fed officials? Is it 3.5%? Is it 4%? Is it 4 and 1/2%?

And I think you're going to get different answers on that, which brings up the overall question, which is it's really not about inflation. It's about the worries over an overheating economy, and overheating means different things to different people. And by the way, a quick plug that we'll be talking about the subject of overheating as the subject of this week's Yahoo U at 11:30 today, so definitely catch that.

MYLES UDLAND: Can I-- let's, you know, come on. Come on. Let's talk about it now. We don't need to do a deep tease. How are you going to define over-- how-- I do have a a question, though, like, how did you come about trying to define overheating? Because, you know, I think, as you know, this morning on the tape plenty of people saying 3.1% one time is now overheating. But I mean, I would argue that it's going to take years of that kind of a print to really talk about that term credibly.

BRIAN CHEUNG: Yeah, and we have to keep in mind that this is part of the challenge of defining overheating, which is that it's not just inflationary figures. We know that expansions don't die of old age. That's something that Janet Yellen has said in the past.

So what kills expansions? Well, it could be a financial bubble that brews from asset valuations rising too high. It could be some sort of external shock. That was the case out of the last expansion with the COVID pandemic, obviously.

And then there's also overheating if you let an economy run too hot with too much easy money flowing around that it is possible there could be some sort of wage-price spiral where you have people consuming a lot of goods, so producers end up raising prices, and then the employees demand higher wages. They then consume more. But the thing is the wage-price spiral kind of thing, economists are on the fence about whether or not that-- that dynamic is still in play. That was what led to hyperinflation in the 1970s.

But our economy, our world is different in 2021 than it was in 1970. So overheating is going to depend on who you're talking to. A lot of those economists that have watched the episodes of the 1970s will say, yes, I know the wage-price spike was real because I saw it. But a lot of economists that are kind of aware of the fact that things have changed as of the last decade or two or three decades will say, wait-- wait a second, overheating might mean something different within the context of our current economy.

And that's because there are different things that are in play when it comes to that wage-price spiral. One example is if employers-- or employees are demanding higher pay, that doesn't necessarily need to mean wages now. It can mean more benefits. It can mean free lunch at work.

There's a lot of collective bargaining differences in the way our labor market works. And guys, I feel like now I'm getting a little bit too much into it. But there's a lot of dynamics at play here, and that's why overheating is such an amorphous term that's difficult to define.

MYLES UDLAND: I mean, I think the natural follow up to this Yahoo U, which, again, we're going to get the full treatment, right in the 11:30 half hour on Yahoo Finance today, is a full breakdown of the Kalecki profit equation, which Brian as someone with a masters, who, with a masters--

BRIAN CHEUNG: Our viewers don't want that. Come on.

MYLES UDLAND: I mean, I know--

BRIAN CHEUNG: Our viewers don't want that.

MYLES UDLAND: I know that you are ready to do some Kalecki, and we're going to get into it on Yahoo Finance. All right, Brian Cheung, thanks for stopping by.