The Federal Reserve's preferred measure of inflation is expected to show that prices continued to climb in July, diverging from the downward trend seen in recent months.

PCE Price Index and Core PCE

On Thursday, the Bureau of Economic Analysis will release the personal consumption expenditure (PCE) price index, which includes both food and energy prices. However, economists tend to focus more on the core PCE, which excludes food and energy prices. Federal Reserve Chair Jerome Powell emphasized the importance of the core PCE in his Jackson Hole speech, stating that global factors heavily influence food and energy prices, making them volatile and potentially misleading when assessing U.S. inflation.

Current Projections

During the summer months, the core PCE experienced a decline. It decreased from an annual basis of 4.6% in May to 4.1% in June. However, economists surveyed by FactSet predict a slight increase in the core annual PCE inflation rate for July, projecting it to be 4.2%. On a monthly basis, core PCE is expected to marginally rise to 0.2% in July from 0.17% in June according to FactSet.

The Cleveland Fed's Estimate

The Federal Reserve Bank of Cleveland provides its own estimate of core PCE inflation. As of Wednesday, their Nowcast estimate for July was 4.23%. They develop this estimate before the official CPI or PCE inflation data is released, offering an early indication of the current rate of inflation.

Uncertainty and Preview

Powell acknowledged that core PCE inflation reached a peak of 5.4% in February 2022 but has gradually declined in recent months. However, he emphasized that it remains uncertain whether these lower readings will persist or how underlying inflation will stabilize in the upcoming quarters. Additionally, Powell previewed a preliminary reading of the core PCE rate at 4.3% in July.

July Inflation Expected to Tick Up Slightly

Economists surveyed by FactSet predict that headline inflation, the measure most directly felt by households and businesses, will increase slightly from 3% to 3.3% year-over-year in July. Monthly headline inflation is also expected to rise from a rate of 0.16% in June to 0.2% in July.

Both headline and core PCE measures for July are likely to remain well above the Federal Reserve's target of 2%. Federal Reserve Chair Jerome Powell acknowledged last week that twelve-month core inflation is still elevated and there is a need to regain price stability.

It's important to note that the inflation readings for July will be affected by base effects, which factor in the calculation of annual inflation figures compared to prices from the previous year. The recent comparison with the high inflation rates seen last spring skews the data, as inflation rates started to decline later in the summer.

Powell and other Fed officials are not surprised by the uneven inflation trends, especially considering July's annual core PCE rate. Consequently, the latest PCE inflation reading is not expected to significantly alter the overall outlook, given that inflation remains well above the central bank's objective, according to Gus Faucher, PNC's chief economist.

Faucher anticipates that the Fed will maintain its restrictive monetary policy in the near term but does not expect the Federal Open Market Committee to raise the federal funds rate at its meeting on September 19-20.

Wall Street appears to share this sentiment, with the CME FedWatch Tool indicating a 90.5% probability that the Fed will keep the federal funds rate unchanged in September, based on movements in interest-rate futures.

The July PCE data will be released on Thursday morning at 8:30 a.m. EDT.

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