Rashaan Baskerville
PCE Affects Your Interest Rates . Do You Know What It Is ?
BIO :
Rashaan Baskerville , Senior Director of Angus Finance , has nearly two decades of experience in the financial services and energy services fields . In his role as a fractional CFO for the fuel distribution industry , he helps dealers develop and implement business growth strategies . He can be reached at rbaskerville @ angusenergy . com .
Did you know that the Federal Reserve ( Fed ) does not use the Consumer Price Index ( CPI ) to track inflation ? We so often hear about the latest CPI trend on the news and how it compares to the Fed inflation target of 2 %, however CPI is the wrong measure to look at . The Fed actually prefers to track a much less familiar index known as Personal Consumption Expenditures ( PCE ).
While CPI focuses on the change in prices of a fixed basket of goods and services , PCE measures the change in consumer spending on the actual goods and services that households are currently purchasing . PCE is more flexible and takes into account substitutions made by households . For example , if the price of beef is rising rapidly due to a shortage , consumers may start buying more chicken instead . The PCE would capture these changes , whereas the CPI would not .
This is the reason that the Fed prefers the PCE over the CPI , because it more accurately reflects the impact of changes in prices on household economics and , hence , the true impact of inflation . The specific version of PCE that the Fed tracks is known as core PCE , which excludes food and energy . As noted above , the Fed ’ s long-term target for PCE inflation is 2 %.
The latest measurement of PCE was 2.9 % as of December 2023 , which was nearly 50 % higher than the Fed ’ s long-term target . According to the latest briefing by Fed Chair Jerome Powell , “ inflation is still too high , ongoing progress in bringing it down is not assured , and the path forward is uncertain . I want to assure the American people that we are fully committed to returning inflation to our 2 % goal .” And although the Fed no longer seems to foresee the need to raise interest rates , there is clear intent to take a cautious approach to making any rate cuts .
PCE was 2.9 % as of December 2023 , nearly 50 % higher than the Fed ’ s long-term target .
Based upon the chart below , we can see that inflation rates according to both PCE and CPI have been trending down . However , the Fed ’ s latest projections for core PCE show that inflation is expected to remain above 2 % through 2026 , reaching 2.05 %. So , what does that mean for the future of interest rates ? While the Fed is making it clear that the process of rate cutting will be slow , we could still see a decrease this year . However , market expectations that were indicating 6 rate cuts this year seem less and less likely with each Fed meeting .
Rashaan Baskerville , Senior Director of Angus Finance , has nearly two decades of experience in the financial services and energy services fields . In his role as a fractional CFO for the fuel distribution industry , he helps dealers develop and implement business growth strategies . He can be reached at rbaskerville @ angusenergy . com . l FON
30 MARCH 2024 | FUEL OIL NEWS | www . fueloilnews . com