PCE Inflation: Why Thursday Brings Two Different Numbers

The Bureau of Economic Analysis will release two reports at 8:30 a.m. Eastern on Thursday, Oct. 29: the advance estimate of third-quarter GDP and September's Personal Income and Outlays. Both carry a PCE inflation figure, and the two figures will not match. One is a 12-month rate, which stood at 3.4% in August. The other is a quarterly rate expressed at an annual pace, which was 5.0% for the second quarter. TradeFlock's angle is simple: know which number is which before the headlines blur them, and watch the saving rate, because August's spending ran well ahead of income.

Two PCE Inflation Rates in One Morning

BEA's August Personal Income and Outlays report showed the PCE price index up 0.3% from July and 3.4% from a year earlier. Excluding food and energy, it rose 0.2% on the month and 3.0% on the year. Core readings strip out the most volatile categories, which is why they are watched for the underlying trend. The 12-month rate was 3.8% in May, 3.5% in June and 3.4% in both July and August, according to BEA's own price index page.

The GDP report uses a different convention. BEA reports quarterly changes at annual rates, meaning one quarter's price increase is projected as if it lasted all year. In the third estimate for the second quarter, the PCE price index rose 5.0% and the core measure rose 3.3%, both revised down 0.3 percentage point from the second estimate.

A rough conversion shows how they relate. A 5.0% annualized pace works out to about 1.2% in the quarter itself (a TradeFlock calculation). The Federal Reserve's 2% goal is defined by the annual change in the PCE price index, so the 12-month number from the income report is the one that maps to the target.

August's Spending Outran Income

The August report holds the more interesting detail for Thursday. Real disposable income was flat on the month, down from a 0.3% gain in July. Real consumer spending rose 0.6%, up from 0.1%. Current-dollar spending climbed 0.9%, or $190.8 billion, with $114.1 billion going to goods and $76.7 billion to services.

Spending that outruns income has to come from somewhere, and the saving rate is where it shows up. It was 4.1% of disposable income in August, with personal saving at $990.2 billion. A single month of spending that outruns income is not a trend, and BEA's report does not say why. But it sets the test for September: if real income stays flat and spending holds up, the saving rate has to fall. If spending cools, the third-quarter GDP number will show it.

The August report also carried BEA's annual update, which revised personal income and outlays back to January 2021. That means the July comparisons above are on the revised basis, not what was first published.

What the Q3 GDP Print Is Up Against

The second quarter shows how much a first number can move. Real GDP grew 1.5% in both the advance and second estimates, then was revised up 0.7 point to 2.2% in the third estimate on stronger investment, consumer spending and government spending. Real final sales to private domestic purchasers, which combines consumer spending and private investment, grew 4.6%. The first quarter was revised to 2.5%.

For the third quarter, the Atlanta Fed's GDPNow model showed 3.5% as of Oct. 20, with its next update due today. The Atlanta Fed describes GDPNow as a running model estimate based on available data, not an official forecast. Given the second quarter's revisions, a gap between that nowcast and Thursday's advance estimate would not be unusual, and the advance number is only the first of three.

The Fed Meets First

The Federal Open Market Committee's meeting calendar lists Oct. 27 and 28 for this month's meeting, so the committee decides before BEA publishes. The next meeting, Dec. 8 and 9, comes with a new Summary of Economic Projections. Thursday's numbers are therefore inputs to December, not to this month's vote. They also arrive with BEA's annual update already folded in, so comparisons with older published figures need care. Earlier TradeFlock coverage of how inflation outpaced wage growth in August and of the September drop in consumer outlook gives context for the household side of these reports.

What to Read First on Thursday

• Monthly PCE price index, September. Compare the 12-month rate with August's 3.4% and the core rate with 3.0%.
• Real disposable income. August was flat. A second weak month would put more pressure on household budgets.
• Saving rate. August's 4.1% is the baseline.
• GDP price index and quarterly PCE prices. Treat these as annualized readings and do not set them next to the 12-month rate.
• Real final sales to private domestic purchasers. It strips out inventories and trade swings that make headline GDP noisy.

Do not expect Thursday to settle anything. BEA's second estimate of third-quarter GDP and the October income report are scheduled for Nov. 25, when this week's numbers can still change.

The bottom line: Thursday's PCE inflation figures come in two versions, the 12-month rate that matches the Fed's target and the annualized quarterly rate that does not, and the saving rate may say more about the next leg of consumer spending than either.

Cover image: "Iowa corn field IMG 1370" by Don McCulley, via Wikimedia Commons, released under CC0.