As markets await the direction of inflation, Thursday's report that often flies under the economic radar is likely to gain greater importance. The Commerce Department's measure of PCE prices could add to the evidence that inflation is more persistent than some economists and policymakers had thought. The January reading is expected to show that the cost of living remains above the Fed's target, despite nearly two years of strict policy aimed at halting the trend. A popular measure among central bank officials, the so-called PCE often takes a back seat in importance among investors to monthly CPI readings. But maybe not this time. “It's going to be a hot number,” said Mark Zandi, chief economist at Moody's Analytics. “Inflation doesn't move in a straight line. It zigzags and zigzags, and it zagged in January.” Zandi expects the PCE price index to show a 0.4% increase for the month at both the headline and core levels that exclude food and energy. The core increase would be double growth in December and represents another challenge for the Fed, which is expected to take its foot off the gas at some point this year. However, he believes policymakers should not focus too much on one number and instead look at the bigger picture, which he said clearly shows inflation falling. Zandi is concerned that maintaining monetary policy for too long could severely hurt the economy. “They should just put that number aside and say: OK, this is why we're not going to change interest rates at the next meeting, but it's not going to change our expectations or expectations for future interest rate cuts.” Al-Zandi said. “Inflation is definitely slowing. All the trend lines are looking good.” Although inflation is off the boil from where it was in mid-2022 — its highest level in more than 40 years — an unexpectedly strong CPI reading in January rattled nerves on Wall Street. Many Fed officials have followed indications that they are concerned about the path of inflation and will need more evidence of monetary easing before agreeing to interest rate cuts. “Expecting all the data to speak uniformly is too high,” Boston Fed President Susan Collins said in a speech on Wednesday. “However, it will be important to see sustained and broad signs of progress toward the Fed’s dual mandate goals — recognizing that progress may be uneven.” Collins added that although she still expects interest rates to be cut this year, she believes the process will take place in a “methodical and forward-looking” manner and will happen “gradually”, rather than at the aggressive pace of cuts that the market was previously anticipating. . Market-based inflation measures have indicated rising expectations. In recent days, the two-year inflation equivalents, or the spread between Treasury yields and Treasury inflation-protected securities, have risen. The benchmark 10-year Treasury yield added nearly a quarter of a percentage point in February, while the 10-year TIPS rate rose more than a quarter of a percentage point. US10Y US10YTIP 3M 10-Year Yield Line to TIPS When looking at the details, PCE inflation gets more focus at the Fed than the Labor Department's Consumer Price Index report, which receives more attention from the public, primarily because it is considered A broader measure that takes into account changes in consumer behavior rather than focusing only on a fixed set of goods and services. Officially, the Fed follows the headline number, but officials tend to focus more on fundamental data as a better gauge of longer-term trends. CPI data as well as the Producer Price Index, which also rose more than expected in January, feed into PCE calculations. Economists expect a monthly gain of 0.3% and a 12-month move of 2.4%, after rising 0.2% and 2.6% respectively in December, according to Dow Jones Estimates. On the fundamental front, expectations are for monthly growth rates of 0.4% and 2.8% annually, compared to 0.2% and 2.9%, respectively, in the previous month, according to Dow Jones estimates. However, this will not be limited to broader readings. Policymakers and market participants will look into the details of the underlying trends. Among the key metrics will be housing and services indicators. “The key area that will really be focused on is the services portion of personal consumption expenditures,” said Michelle Clover, chief portfolio strategist at Global X, which runs Global “. $51 billion portfolio of global ETFs. “We really want to see disinflation trickle down to services, because that is the key element necessary to reach sustainable levels of inflation.” Kluver added that if personal consumption expenditures data confirms that inflation remains above target, attention will then shift to the February and March reports, which could prompt the Fed to make further cuts. Markets currently expect the first cut to come in June or July. “If we continue to see hot data coming through February and March, I would start to be more cautious about June being the first meeting” of the cut, she said. This, in turn, would raise concerns about the economic trajectory. Signs of Trouble Zandi believes that if the Fed sticks to a hawkish economic policy, it could pose a major risk to the expansion. “I've been relatively optimistic about the economy, but I'm a little nervous about some of the vulnerabilities in the labor market and financial system,” the Moody's economist said. “The only thing keeping the labor market from collapsing is that layoffs remain low,” he added. “But I think the labor market is much more fragile than people think. I'm increasingly concerned that the Fed will make a mistake and keep its foot on the economy for too long. And for what purpose?” Wednesday's report confirmed that economic growth was strong through the end of 2023, with gross domestic product accelerating in the fourth quarter at an annualized pace of 3.2% adjusted for seasonality and inflation. Although that was lower than the initial estimate of 3.3%, it still showed that the fundamental forces of the US economy, namely consumer spending and services, remain strong. In addition, the report showed that so-called chain-weighted expenditures adjusted for consumer behavior rose by 1.8% on a quarterly basis, the smallest increase since the Covid shock in the first quarter of 2020. Moreover, commodity-weighted prices actually fell by 1.4%. %, which is the lowest reading since the second quarter of 2020 and indicates an actual contraction of a large portion of consumer spending.
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The January Personal Consumption Expenditures (PCE) inflation report may receive a lot of market attention on Thursday
