Power & Market

Current PCE Inflation: 4.1%

Bureau of Economic Analysis

The Bureau of Economic Analysis released January figures for Personal Consumption Expenditures (PCE) today, including the price index based on that data.

News headlines report the year-over-year percent change in the PCE price index: 2.4%. This gives the impression that price inflation is heading towards the Federal Reserve’s supposed target of 2%.

But the data is released monthly, and this way of calculating inflation is slightly misleading. As Joseph Salerno warned,

This way of calculating the annual inflation rate is backward looking, because the most recent monthly rate is heavily outweighed by the previous eleven months' rates.

In contrast, calculating the annual inflation rate by compounding and annualizing the most recent monthly or quarterly rate of change in the CPI gives a better idea of what inflation currently is and how it may be trending.

This more accurate calculation reveals an annualized price inflation rate of 4.1%. In December 2023, the PCE index was 121.451; in January 2024, today’s release, it was 121.870. This is a 0.3% month-over-month increase, equivalent to a 4.1% annualized rate.

It means that above-target price inflation is still here. Today’s release shows that price inflation still exceeds some data points during the height of price inflation panic, including September 2021 and four months in 2022.

This way of calculating price inflation, while still “crude and inaccurate,” is a closer reflection of what households are facing – it’s closer to what “a judicious housewife,” in Ludwig von Mises’s words, “knows … about price changes as far as they affect her own household”:

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place.  These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred.  In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life. A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.

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