The Fed's most well-liked inflation indicator might be launched on Friday. What to anticipate
A customer shops at a supermarket in Arlington, Virginia on August 14, 2024.
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Federal Reserve officials will get an update on their key inflation indicator on Friday, a snapshot of data that could influence the September interest rate decision, even if policymakers' attention appears to be elsewhere for now.
At 8:30 a.m. ET, the Commerce Department will release its Personal Consumption Expenditure Price Index, a comprehensive measure of what consumers pay for a range of goods and services and their spending preferences.
While the Fed uses a range of indicators to measure inflation, the PCE index is its main data point and its only forecasting tool when members release their quarterly forecasts. In making their interest rate decisions, policymakers focus primarily on the core PCE indicator, which excludes food and energy.
The Fed prefers the PCE to the Labor Department's consumer price index because the former takes into account changes in consumer behavior, such as substitute purchases, and is broader in scope.
For the July reading, the Dow Jones consensus sees little change from recent trends – monthly increases of 0.2% in headline and core prices and year-on-year gains of 2.5% and 2.7%, respectively. At the core level, the 12-month forecast even points to a slight increase from June, while the headline index remains unchanged.
If the values are roughly in line with the forecast, they are unlikely to deter Fed officials from making the much-anticipated interest rate cut at their monetary policy meeting on September 17 and 18.
“For me, this is just further evidence that the Fed sees sustainable inflation numbers at a sustainable pace,” said Beth Ann Bovino, chief economist at US Bank. Slight upward movements are “just base effects that will not change the Fed's view.”
Fed officials cannot yet claim they have defeated inflation, but recent statements suggest a more positive outlook. The central bank's inflation target is two percent per year.
Although corresponding PCE readings have not been below that level since February 2022, Fed Chair Jerome Powell said last week that “my confidence has grown” that inflation is returning to target levels. However, Powell also expressed some reservations about the labor market weakening, and it now appears that the Fed is shifting away from its role as an inflation fighter and focusing more on supporting employment.
“The upside risks to inflation have diminished. And the downside risks to employment have increased,” Powell said.
That assessment was seen as an indication that policymakers will be more focused on preventing a labor market reversal and a broader economic slowdown. That, in turn, could mean paying less attention to numbers like Friday's PCE reading and more attention to the Sept. 6 report on August nonfarm payrolls.
“The Fed's focus will be on the labor market front,” Bovino said. “They seem to be more concerned with whether the labor market weakens a little bit. I think that's the focus of their monetary policy.”
In addition to Friday's inflation figures, personal income in July is expected to rise by 0.2 percent and consumer spending is expected to rise by 0.5 percent.
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