Discover Why Jeffrey Gundlach is Turning to PCE as the Key Inflation Measure After CPI ‘Bites’ the Fed
PCE, which comes out Feb. 29, “cannot go up and have the Fed talking about cutting interest rates,� Gundlach said. The three-month annualized core CPI is coming up now and the trend may stick, he added, so the market can no longer look at it and take comfort.
When it comes to measuring inflation, the Consumer Price Index (CPI) has long been considered the gold standard by economists and policymakers. However, renowned bond investor Jeffrey Gundlach has recently made headlines by turning to an alternative measure known as the Personal Consumption Expenditures (PCE) index as his preferred indicator of inflation. This decision has raised eyebrows and sparked discussions among analysts and investors alike. In this article, we will take a closer look at why Gundlach is choosing PCE as the key inflation measure after CPI ‘bites’ the Fed.
What is CPI and Why Has it Been the Standard Measure of Inflation?
First, let’s define what CPI is. CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is calculated by the Bureau of Labor Statistics (BLS) and is based on a fixed basket of goods and services, which is supposed to represent what the average consumer spends their money on. CPI is widely used as a benchmark for adjusting salaries, wages, and government benefits, as well as determining interest rates and inflation targets for central banks.
CPI has been the primary measure of inflation for decades due to its widespread availability and historical significance. It is also considered a reliable indicator because it is based on a large sample of consumer transactions and is updated on a regular basis. However, as the economy and consumer behaviors have evolved, some experts argue that CPI has become less representative of the true cost of living for the average American.
Why is Jeffrey Gundlach Turning to PCE as the Key Inflation Measure?
Jeffrey Gundlach, CEO and Chief Investment Officer of DoubleLine Capital, is known in the investment world as the “bond king.” With nearly 35 years of experience in the bond market, his views and strategies are closely followed by investors and analysts. Gundlach recently made headlines when he announced his shift to PCE as his preferred measure of inflation. This surprised many, as he has been a vocal critic of the Federal Reserve’s reliance on CPI as an inflation measure.
PCE is similar to CPI in that it also measures the change in prices for goods and services over time. However, PCE is based on a different basket of goods, which includes healthcare and financial services, as well as a different calculation methodology. PCE also includes a broader range of consumer expenditure data, making it a more comprehensive measure of inflation. So why is Gundlach choosing PCE over CPI?
One of the main reasons is that PCE is a more inclusive measure of inflation. As mentioned, it includes a wider range of goods and services, making it a more accurate reflection of the cost of living for consumers. This is especially important given the changing consumer landscape, where healthcare and financial services expenses have grown significantly in recent years. Gundlach also points out that PCE has a lower bias towards housing and healthcare, which are areas that tend to have inflation rates above the overall CPI index.
PCE is also considered to be more “market-based” than CPI, as it is based on actual consumer spending data rather than self-reported surveys. This data is collected through tax records and other sources, making it less susceptible to the inherent biases that can be present in surveys. This gives PCE a more accurate representation of actual consumer spending patterns and inflation trends.
Another factor in Gundlach’s decision is the Fed’s recent shift to “average inflation targeting.” This means that instead of targeting a specific 2% inflation rate, the Fed will aim to achieve an average of 2% over time. This move has caused some concerns among investors that inflation could potentially run higher than the desired 2% rate. PCE, which has consistently shown lower inflation rates than CPI, may help alleviate these concerns and provide a more accurate measure of actual inflation levels.
What are the Implications of Gundlach’s Decision?
As one of the most influential and successful investors in the bond market, Gundlach’s decision to turn to PCE as his preferred inflation measure could have significant implications. It could lead to more attention being given to PCE as a key measure of inflation, which could ultimately impact the Fed’s monetary policy decisions. It may also influence other investors and analysts to shift their focus to PCE as well.
Furthermore, the Fed’s shift to average inflation targeting and Gundlach’s support of PCE may also signal a potential increase in inflation in the coming years. This could have implications for the bond market, as higher inflation could lead to an increase in interest rates. Investors and consumers alike would need to be prepared for these changes and adjust their strategies accordingly.
Conclusion
In conclusion, Jeffrey Gundlach’s decision to turn to PCE as the key inflation measure after CPI ‘bites’ the Fed has sparked discussions and could potentially have significant implications. While CPI has been the go-to measure for inflation for decades, there are valid arguments for why PCE may be a more accurate and comprehensive indicator. With the Fed’s shift to average inflation targeting and increasing healthcare and financial services costs, it may be time for a new standard measure of inflation. Only time will tell if PCE will surpass CPI to become the new gold standard, but for now, it’s definitely worth keeping an eye on.
