Inflation is in the eye of the stat you use/Earnings comments/China teases weaker yuan

For my longer term readers, I'm sorry to have to rehash again the difference between how CPI (ahead of the updated figure today) and PCE are calculated but I think it is very important as it directly influences monetary policy and also in light of the tragic murder of the UNH executive where we guess/assume there was denial of coverage involved.

The Fed we know has told us that PCE is their inflation guiding light and the reason they give is mostly due to the substitution affect where if beef gets too expensive, people switch to chicken. Ok, fine. But, the real problem with PCE and why it consistently runs below CPI anywhere from 50-100 bps is because healthcare is its biggest component, running at 21% vs CPI which only has it at 9% and housing which CPI overweight's to the tune of 32% while it is only about half that in PCE.

The problem with the PCE's biggest component is that most of it is calculating medical care costs that are paid through employer provided health insurance (hence the UNH reference) and through Medicare and Medicaid. Firstly, this is NOT measuring what consumers are coming out of pocket with on healthcare which is what CPI is calculating instead. Secondly, if you think that these entities are reimbursing healthcare providers at market rates, I'm wrong but they are not and reimbursements run below the true costs of providing healthcare services, sometimes well below. So, the biggest component of PCE is not even measuring out of pocket consumer expenses and is notably understating its realistic cost anyway.

With housing, PCE is way understating what is the biggest cost for most consumers. And I've seen many studies that at least for renters, about 1/3 of their income goes to rent, which CPI is capturing. For homeowners, their equivalent cost is property taxes, which CPI doesn't include, but usually runs 3-5% higher each year. Property taxes, depending on where one lives, is definitely a much lower cost as a % of one's income.

So, we have a Federal Reserve that is not only trying to figure out what they want the REAL rate, aka neutral rate, to be, but they are also referencing what I believe is a flawed inflation stat that results in the fed funds rate to be below where it should, right now by 50 bps (the spread between core CPI and core PCE). If the Fed was using the CPI instead, the REAL rate of about 125 bps currently is well below the historical level of about 200 bps pre GFC vs 175 bps up against PCE.

From this piece from Morningstar a few months ago is this pie chart on the differences. https://www.morningstar.com/markets/whats-difference-between-cpi-pce:

Casey's General Store, the Midwest convenience store operator, is always a good tell on the consumer and this from their earnings call yesterday: