What every American investor should know

The Department of Labor publishes the Consumer Price Index (CPI) every month to monitor the inflation rate in the US. The chart below displays the annual rate of change, month to month, of the CPI in the Greenspan/Bernanke era. As you can observe it has averaged about 2.5%.

The Department of Labor also publishes a ‘core’ CPI, excluding the so called volatile food and energy components of the CPI. This statistic during the same period has also averaged about 2.5%, but has been closer to 2% over the past two decades.

The FED monitors the CPI, and inflation expectations, but they also track the PCE index.

The Personal Consumption Expenditure (PCE) measure is the component statistic for consumption in GDP collected by the BEA. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.

When we review the chart of the PCE in the Greenspan-Bernanke era, the consumption rate has remained between 2 1/2% and 9 1/2% since 1987. Notice every time it has dropped to around 3% was during a recession. The average PCE consumption rate, prior to the 2008 drop, has been around 5% annually.

Now observe what has happened over the past few years. In October 2008 the FED started QE 1 when consumption was plummeting. There was a slight bounce in early 2009, but it then broke lower. QE 1 was then expanded to $1.4 tln. Consumption then picked up, and hit over 4% by 2010. When it started to drop toward 3% in mid 2010, a $600 bln QE 2 program was announced. A higher, and statistically normal, rate of 5% was achieved in 2011. Now look at it drop again. We believe the FED will start a QE 3 program should the consumption rate approach 3% again.