Amidst market uncertainties regarding the direction of inflation, an often-overlooked economic report on Thursday is expected to gain more significance. The Commerce Department’s measurement of personal consumption expenditures prices may provide further evidence that inflation is persisting more than anticipated by some economists and policymakers.
Projections for January indicate that the cost of living is likely to remain above the Federal Reserve’s target, despite nearly two years of tight policies aimed at curbing inflation. While the consumer price index usually takes precedence among investors, the Personal Consumption Expenditures (PCE) report might assume greater importance this time.
Mark Zandi, Chief Economist at Moody’s Analytics, anticipates a 0.4% increase in the PCE price index for January, both in the headline and core levels excluding food and energy. This core increase would be double the growth observed in December, posing a challenge for the Federal Reserve, which is expected to ease its monetary policy later in the year.
Zandi suggests caution in placing too much emphasis on a single number, emphasizing the importance of considering the broader economic picture, which, according to him, indicates a clear easing of inflation. He expresses concern that maintaining tight policies for an extended period could negatively impact the economy.
While inflation has moderated since its peak in mid-2022, a robust consumer price index reading in January raised concerns on Wall Street. Some Federal Reserve officials signaled apprehension about the inflation trajectory, stating a need for more evidence of easing before approving rate cuts.
Boston Fed President Susan Collins emphasized the importance of looking for sustained, broad progress toward the Fed’s dual mandate goals while acknowledging potential uneven progress. Despite expectations of rate cuts this year, Collins envisions a gradual and methodical process rather than aggressive cuts.
Market-based indicators of inflation have shown rising expectations, with inflation breakevens and Treasury yields increasing in recent days. The 10-year Treasury yield has risen, reflecting concerns about inflation.
The PCE inflation measure, more emphasized at the Fed than the Consumer Price Index (CPI), is considered a broader measure that accounts for changes in consumer behavior. Although the Fed officially follows the headline number, officials often focus more on the core as a better measure of longer-term trends.
Economists anticipate a 0.3% monthly gain and a 2.4% 12-month move on the headline for February, with a 0.4% monthly and 2.8% annual rate on the core. Policymakers and market participants will scrutinize details for underlying trends, particularly in housing and services indicators.
If the PCE data confirms that inflation is still above target, attention will likely shift to the February and March reports, potentially delaying Fed cuts, which are currently expected in June or July.
Concerns about the economic trajectory arise if the Fed maintains a tight economic policy for too long. While a report confirms solid economic growth to close out 2023, there are growing worries about vulnerabilities in the labor market and the financial system. Maintaining economic tightness for an extended period could pose risks to the expansion.
Zandi expresses concern about the fragility of the labor market and fears that the Fed might make a mistake by keeping its foot on the economy for too long. A report showing economic growth in the fourth quarter of 2023 indicates the resilience of consumer spending and services, but caution is warranted amid uncertainties in the economic landscape.
