PCE
The Fed’s worry about low inflation is largely due to the primary measure it uses, the PCE price index, which does indeed show continued low inflation. Because of the way this index is calculated, however, medical costs are based largely on government reimbursements, which have been limited and are running below the private-sector costs tracked in the CPI. This and other such factors have the PCE showing a lower level of inflation than the more commonly used measures.
As long as the Fed continues to focus on the PCE, it is less likely to act. But as the gap gets wider and the more publicized measures increasingly affect people’s decisions, the pressure on the Fed will build. This is not a today problem, but it will very likely be problem in a year or so. Expect to see faster rate increases in the medium term, as the Fed runs out of wriggle room.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.