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The BLS published CPI numbers for July . PCE, the Fed’s preferred measure of inflation, won’t be published until August 30. Here are my projections through September.

CPI data from the BLS, PCE data from the BEA, chart and projections by Mish

Chart Notes

• CPI is the consumer price index. Monthly reports are from the Bureau of Labor Statistics (BLS), the same organization that posts the monthly jobs reports.
• PCE is the Personal Consumption Expenditures price index not to be confused with PCE spending. The latter is in dollars. PCE reports are from the Bureau of Economic Analysis (BEA), the same organization that posts the quarterly GDP reports.

CPI Measurements

The CPI measures prices of items directly paid by consumers. Shelter has the biggest weight at 36.315 percent of the entire index.

Home prices are not in the CPI, just rent and Owners’ Equivalent Rent (OER). OER is the price a homeowner would pay to rent if they rented instead of owned.

PCE Measurements

The PCE contains items directly paid by consumers but also expenses paid on behalf of consumers. Medical care is the best example. The PCE measures prices of individual policies as well as corporate health policies and Medicare.

CPI vs PCE

Neither measures home prices directly. Both measures are flawed. Inflation matters, not just consumer inflation. The Fed has not figured this out.

As a result of the difference in measurements and weights, Rent has a bigger impact on the CPI compared to PCE, and PCE overweighs health care vs the CPI.

The biggest factor in estimating year-over-year changes is what happened to the month-over-month change a year ago.

Investopedia notes “Prior PCE figures are subject to revision every year. That can result in different measurements over extended periods. Some observers feel that this reflects the inability to value personal consumption expenditures accurately.”

Month-Over-Month Change a Year Ago

• CPI July: 0.2 Percent
• CPI August: 0.5 Percent
• CPI September: 0.4 Percent
• PCE July: 0.1 Percent
• PCE August: 0.4 Percent
• PCE September: 0.4 Percent

August and September numbers will be east to beat. If the CPI and PCE numbers are better than what happened a year ago, the year-over-year number will drop.

July is a difficult number (0.1) to beat for the PCE. Nonetheless, I projected a year-over-year decline anyway. To understand why, let’s dive into the latest CPI report.

Consumer Price Index a Tad Better than Expected Year-Over-Year

On August 14, I commented Consumer Price Index a Tad Better than Expected Year-Over-Year

Shelter Was Hot

The largest component in the CPI is Owners’ Equivalent Rent (OER) with a weight of 26.76 percent. OER is the price homeowners would pay to rent their own home if the rented instead of owned.

Rent of Primary Residence is another 7.64 percent, and the broader Shelter category is a huge 36.32 percent of the CPI.

Shelter rose 0.4 percent as did OER. Yet, the CPI was only up 0.2 percent.

Good News on the Medical Front

Medical care services, with a weight of 6.51 percent in the CPI, declined 0.3 percent in July.

Medical care commodities, with a CPI weight of 1.48 percent, rose 0.2 percent.

Given the PCE overweighs medical care and underweights rent relative to the CPI, I expect a small improvement on the year-over-year PCE price index despite a tough year-over-year comparison.

On August 13, I commented Expect Good to Very Good CPI Reports for July, August, and September

I estimated a year-over-year decline of 0.1 percent to 2.9 percent and that is what happened despite hot shelter components.

Today I am forecasting the PCE and CPI through September.

Based on the shelter component running hot, I upped my CPI forecast numbers by 0.1 percentage points for August and September.

Caution to Treasury Shorts

The easy year-over-year comparisons will allow the Fed to cut faster than many will think it should.

And if rent starts posting month-over-months gains of 0.2 percent or less, we could easily see the year-over-year CPI dip below 2.0 percent in the September report (posted in October).

I would not advise shorting long-dated US Treasuries here.

Recession Underway

I believe we are in recession and the recession will strengthen. Politically speaking, Recessions always hurt the incumbent party.

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