Checking the tape - key takeaways from April 2024 PCE inflation

As a reminder, Bancreek publishes two visualizations that can help you explore PCE in granular detail. Both of these visualizations have now been updated through April and are embedded below:

This post hopefully will further assist in your analysis of the moving parts underlying this month’s PCE print. Its goal is not to provide a comprehensive analysis of the nearly 200 items we track (that’s what the visualizations are for), but rather just to point to the most meaningful changes from one month to the next.

To perform this analysis, we track a measure we call “inflation impact,” which we calculate by multiplying each item’s YoY inflation by its weight in the prior year period. You can think of this as “weighted inflation” as opposed to the “unweighted inflation” that is more commonly reported by the media. Each month we take the weighted inflation of each item we track in PCE and then sum them up to overall PCE. Then we compare these weighted inflation numbers from one month to the next to see what drove the sequential increase or decrease. In this way, we can precisely identify the most significant drivers in the change in YoY PCE from one month to the next.  

Again, in April 2024, overall YoY PCE fell just 5 basis points. When we look at the change in item-level inflation impact from March to April, we see that the largest favorable move was in Used light trucks, which shaved 6.0 basis points off YoY inflation alone. As shown in the chart below, the other items that were most favorable were Legal services (3.3 basis points favorable), Nonprofit hospitals’ services to households (2.6 basis points favorable) and Used autos (1.9 basis points favorable). The sequential favorability in used autos and trucks shouldn’t come as a surprise though as a few weeks ago we reported that this was the largest driver of the reduction in CPI-U in April 2024.

Source: Bancreek Capital Advisors, LLC

However, these favorable items were partially offset by some unfavorable items. As shown below, the largest unfavorable change in an item’s inflation impact was Hotels and motels (2.7 basis points unfavorable), followed by Commercial banks (2.6 basis points unfavorable), Computer software and accessories (2.5 basis points unfavorable), Spectator sports (2.0 basis points unfavorable), and Women’s and girls’ clothing (1.9 basis points unfavorable).

Source: Bancreek Capital Advisors, LLC

We believe it’s important to look at the changes in each of these largest favorable / unfavorable items in context of their historical volatility. To assist with this, the image carousel below shows the trend chart for each of the aforementioned items. If you quickly flip through the images, you’ll notice that aside from Spectator sports (which has exhibited tremendous, uncharacteristic volatility since COVID), all the most favorable and unfavorable items in April 2024 experienced inflation that was well within their range of normal historical volatility.

If you are keeping tabs, you’ll note that these items all net out to a 2.1 basis point favorable move in inflation. The remaining 2.9 basis points of favorability compared to March 2024 was the net effect of there being more items with small favorable changes in inflation impact than those with small unfavorable changes in inflation impact. Outside of the items already mentioned earlier, we count 73 favorable items to 55 unfavorable items. But this is nothing to get too excited about as the inflation impact of most of these items changed from one month to the next by less than 0.5 basis points! In other words, the change in inflation impact on most PCE items was barely perceptible this month. 

This month’s PCE was largely a repeat of last month’s PCE. And recall that last month’s PCE was essentially identical to February’s PCE after adjusting for the change in gasoline price inflation. So, this marks the third month in a row of very little underlying change in underlying items driving PCE. Moreover, the items that have changed from one month to the next have largely all done so within range of their normal historical volatility.

In short, it’s our view that this PCE report offers no evidence one way or another that the underlying components of PCE are improving or regressing.