Core PCE Prints Cool Validating Our Bullish View

PCE headline printed negative at .1% with PCE core also coming in below consensus at .1%.  The beat was driven by a flat print on the highly distorted financial services component which came in flat although the year over year number is still 9% due to the BEA’s deeply flawed methodology.  The print validates our view that a rate increase at this point would be completely irrational as all of the current above target inflation is driven by an increase in energy prices and mismeasurement of shelter and financial services by the BLS and BEA.

The PCE print validates our view that the current FOMC is incompetent as PCE-R is at only 2.1%.  PCE-R corrects the BEA’s deeply flawed methodology by using market prices for shelter and financial services,.  Fed policy has zero impact on energy prices, and the sectors that the Fed does impact (housing, construction and hard goods) are in recession and market price increases in those sectors are negative. Consequently, there is no case for a rate increase and after the Strait is reopened, rate decreases will be required to keep inflation above the Fed’s arbitrary 2% target.