Daily Spotlight: Fed’s Favorite Inflation Indicator Out Today

Summary

The Fed’s favorite inflation indicator, the PCE Price Index, will be released this morning. The index differs from the better-known Consumer Price Index in that its composition is changed more frequently and is thus quicker to reflect real-time pricing fluctuations. In the most-recent report, through November, PCE inflation was reported at 2.6% (the latest CPI report, through December, had inflation at 3.4%). Core PCE, which removes volatile food and energy prices, was 3.2% in the latest month, down from 3.4% in the prior month. Our forecasts call for 2.7% for the headline number and 3.0% for the core. Overall, inflation in this cycle peaked in summer 2022 and has been on a downward trek, though the rate of decline is stalling. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.5% rate year-over-year, down from 2.6% a month ago. We note the numbers are distorted somewhat by a sharp decline in Producer Price Intermediate Goods, which are falling at a 19% rate and likely point to easing prices across the inflation spectrum in the months ahead. Focusing on core inflation — which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy, the core GDP PCE Price Index, the five-year forward inflation expectation rate and the 10-year TIPs Break-even Interest Rate — our reading is 2.74%, down 10 basis points month-over-month. That’s lower largely because sticky prices like shelter and transportation are finally starting to ease (the Sticky Price Core CPI Index reading is 4.6%, down from 5.6% six months ago). Looking ahead, investors are expecting that the Fed’s series of rate hikes ultimately will tame inflation, with the five-year forward expectation rate at 2.32%.

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