Mind The Incoming—It’s Real Stagflationary

Me thinks it’s sticky and then some. We are referring to today’s release of the Fed’s favorite sawed-off inflation ruler—the PCE deflator.

The headline number was up by 5.04% on a Y/Y basis in February, which was held to be progress from the 5.36% reading posted in January. But lurking below the surface was this spoiler: The PCE deflator components for services just kept on climbing. In fact, since the Fed started its anti-inflation campaign in March 2022, the trend has been steadily higher:

Y/Y Change In PCE Deflator For Services:

• March 2022: +4.8%;

• April 2022: +4.8%;

• May 2022: +4.9%;

• June 2022: +5.1%;

• July 2022:+4.7%;

• August 2022: +5.1%;

• September 2022: +5.4%;

• October 2022: +5.5%;

• November 2022: +5.3%;

• December 2022: +5.4%;

• January 2023: +5.2%;

• February 2023: +5.7%.

Overall, the PCE price index for services is now rising at the fastest rate since 1984:

Nor is the February number some kind of fading aberration. The three-month annualized gain posted at +5.8%. Since services sector prices are the most directly impacted by Fed tightening, it’s evident that the Fed’s rising interest rates still have what Robert Frost called “miles to go” before they sleep (pause).

That’s especially the case because the modest cooling of the PCE deflator’s top line recently was owing to a sharp drop in the durables component, which was down at a -2.5% annualized rate during the last three months. The latter, in turn, was heavily impacted by a -24.2% annualized drop in used vehicle prices during the same period.

Then again, maybe it shouldn’t have been. Turns out that on a three-month annualized basis the authoritative Mannheim index from the used car auction market was up by +19.5%. Both can’t be true, of course, but even before push-comes-to-shove we’d put our money (and later BLS “revisions”) on Mannheim.