Getting U.S. inflation back down to low prepandemic levels is going to hit some “bumps,” in the road, Federal Reserve officials say. Expect another bump on Thursday.
The PCE index, the Fed’s favorite inflation gauge , is expected to show a bigger increase in prices in January than the central bank is comfortable with. The report follows on the heels of sharper increases in consumer and wholesale prices last month that raises doubts about the path of inflation.
The headline PCE index is forecast to show a 0.3% increase in January, marking the largest gain in four months.
The more closely followed core rate, which strips out food and energy, is seen rising 0.4%. That would be the largest advance in almost a year.
The Fed views the PCE index as the best measure of U.S. inflation.
For one thing, it gives less weight to the cost of housing compared to the better known consumer price index. Shelter prices are hard to measure, economists say, and the CPI probably inflates its importance.
The PCE also takes into account how consumers change their behavior when prices rise.
Most people substitute cheaper products for more expensive ones — say ground beef for strip steak — when prices rise, That can limit increases in overall U.S. inflation.
In any case, the Fed wants to see inflation continue to slow before it cuts interest rates.
The yearly rate of inflation, using the PCE, stood at 2.6% in January. It could slip a bit more to 2.4% as higher monthly readings from last year drop out of the equation.
The core PCE rate in the 12 months ended in January is likely to hold steady at 2.8% — above the Fed’s 2% goal.
Wall Street is already prepared for a stronger PCE inflation report. What could change views on inflation are any surprises.
A smaller-than-expected increase in inflation would be welcome news to investors. But if prices rise faster than Wall Street
SPX
predicts, it would raise fresh questions about whether inflation will slow fast enough this year to warrant a reduction in interest rates soon.
Fed officials don’t appear all that worried. While they expect more bumps in the months ahead, they believe the rate of inflation will temper further toward their 2% goal by the end of the year.
