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The Fed's Favorite Inflation Gauge

The Fed’s favorite inflation gauge notches a 4-decade high as core personal consumption expenditures (PCE) hit 5.21% in January 2022.

As a follow-up from last week’s talking points, recall the Labor Department’s CPI All Items increased 7.5% in January 2022 from a year ago as U.S. consumers continue to feel the squeeze of rising costs on everything from food, gasoline, apparel, home furnishings, and travel. This week, the Federal Reserve’s preferred measure of inflation, Core PCE, hit a 38-year high of 5.21% as ongoing supply constraints and strong consumer demand continue to drive pricing pressures.

The chart below illustrates the 1-year % change in Core PCE growth rate levels of 5.21% has not been seen since April of 1983. The Commerce Department’s overall measurement of consumer inflation, including the volatile food and energy categories, rose 6.06% to levels not seen since February 1982. 

Core PCE vs. PCE 1-Year & Change:

Core PCE vs. PCE 1-Year & Change-

Labor Department vs. Commerce Department Inflation Measures:

The Labor Department’s CPI measure typically runs higher than the Commerce Department PCE measures of consumer inflation. In addition to differences in the sample populations, variances between the two gauges of inflation can also be attributed to the differences in weights assigned to various categories of goods and services and their relative impacts on each index respectively.

Labor Department’s CPI Inflation Measurement:

  1. Changes in the cost of living in URBAN areas
  2. Costs paid out of pocket only
    a. Example - medical out of pocket expenditures only
  3. Basket of hypothetical goods and services

Commerce Department’s PCE Inflation Measurement:

  1. Changes in the cost of living in URBAN and RURAL areas
  2. Costs paid out of pocket, plus
  3. Costs paid by businesses on behalf of consumers
    a) Example – Medical insurance benefits paid on behalf of consumers from company-sponsored healthcare plans
    b) Example - Employer contributions to those same healthcare plans
  4. Basket of hypothetical goods and services 


Last week’s record-breaking CPI All Items along with this week’s record-breaking PCE reflects pricing pressures for January 2022 relative to the same period a year ago. Since these January measurements, Russia’s invasion of Ukraine has propelled oil prices to 7-year highs. This most recent rise in oil prices will work through the entire economy over the next few months and will continue to pressure prices for all goods and services. The stage is clearly set for the Federal Reserve to begin its policy tightening cycle with the March FOMC meeting. The question at this point is are we going to see a 25-bps increase in the Federal Funds Rate out of the March FOMC meeting? or something more aggressive like a 50-bps increase? We have not seen a 50-bps increase in the Federal Fund Rate out of a single FOMC meeting since May of 2000. 

As we have been communicating over the last several weeks, investors have been put in between a rock and a hard spot with the battle of risk vs inflation. To fight inflation, risk-on assets are required, and to fight volatility (risk), risk-off assets are required. So as inflation numbers continue to persist, and geopolitical events continue to unfold, investors will need to find patience and balance in their portfolio and financial plan.

Risk vs. Inflation


We have 22 core portfolios and 6 alternative portfolios to help you find the right balance for your investing objectives. If your investment objectives or concerns have changed, please reach out to us and we can adjust your portfolio. This is only necessary if your risk appetite has changed. We continually adjust the portfolios to maintain what we believe to be an ideal balance between risk and reward and will continue to adjust as world events and data progress.

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Information contained herein is based on data obtained from sources believed to be reliable; however, such information has not been verified by Carlton Financial Group, LLC d/b/a Carlton Wealth or Synergy Financial Management, LLC. The information provided has been prepared and distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy or an offer of advisory services.

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