The US CPI data came out earlier but if the Fed and new Fed Chair had a favorite inflation measure it remains the PCE. The important thing to realize is that PCE is not simply CPI translated into another index. The BEA builds PCE using a mix of CPI, PPI, and other source data.
For the monthly core PCE estimate, the biggest pieces traders watch are:
- From CPI: Many consumer-facing services and goods, particularly housing/rents, medical services, transportation services, recreation, education, and various other consumer services. CPI gives analysts an early read on many PCE components.
- From PPI: Several components that aren’t captured well by consumer prices. The most market-sensitive are health-care services—including physician services, hospitals and nursing care—as well as airfares/air transportation, financial services, insurance and portfolio-management-related prices.
- Other sources: BEA also uses additional government and industry data, so CPI and PPI don’t completely determine PCE.
Why tomorrow’s PPI matters
After today’s CPI, economists can make a preliminary core PCE estimate, which is why you’re seeing estimates around +0.16% to +0.23%.
Tomorrow’s PPI fills in some important missing pieces—especially health-care and financial-service components.
Nevertheless, there are some estimates that are being shared ahead of the PPI.
Pantheon, is often followed by the market and they quesstimate a rise of +0.16% core PCE estimate. That would lower the annual rate to 3.2% from 3.3%. They state that if so, it would be enough to keep the Fed on hold in September.
Other estimates show:
- Oxford Economics: Forecasts headline PCE +0.1% m/m and core PCE +0.2%, saying the CPI data strengthen the case for a September hold.
- Goldman Sachs: Sees a somewhat firmer +0.23% m/m core PCE increase. Methodology changes could add volatility while lowering the annual core inflation rate.
Bottom line: Estimates cluster around a 0.2% monthly core PCE increase, reinforcing expectations that inflation is gradually cooling and giving the Fed room to keep rates unchanged in September.
Of note is that the September meeting decision is on September 16. The PPI data will be released on September 10 while the CPI will be released a day later on September 11. The US jobs report will be released on September 4th.
So although the prognosticators are saying something in line with the estimates would be “good enough to keep the Fed on hold in September”, the fact is it likely won’t as key data points will still be released before the next meeting.
The current headline and core PCE shows.
Those numbers are still well above the 2% target.
The market’s and analysts may be more confident of no rate change in September, but my guess is that it may take until September 11th to really know what may happen.
September th
This article was written by Greg Michalowski at investinglive.com.
