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What to expect from the Fed’s preferred inflation gauge on Friday?
Fed officials will once again take a look at their preferred inflation gauge on Friday, data that could influence the September interest rate decision even as policymakers appear to be focused elsewhere.
Measuring Inflation
While the Fed uses a full panel of indicators to measure inflation, the personal consumption expenditures (PCE) index is the data point it tracks and the only forecasting tool when members release their quarterly forecasts. Policymakers focus particularly on the core PCE measure, which excludes food and energy, when making interest rate decisions.
The central bank prefers the PCE measure over the Labor Department’s Consumer Price Index, which takes into account changes in consumer behavior such as replacement purchases and is broader.
For July, the Dow Jones is predicting little change in recent trends, with both headline and core prices up 0.2% on the month, and annualized gains of 2.5% and 2.7%, respectively.
“To me, this is just going to be another piece of evidence that the Fed is seeing sustained inflation readings at a sustained pace,” said Beth Ann Bovino, chief economist at US Bank. “Any small uptick is really just the kind of base effect stuff that won’t change the central bank’s view.”
Eye on the labor market
The view has been taken as a signal that policymakers will be more focused on preventing a labor market reversal and a broader slowdown in the economy.
In turn, that could mean less focus on numbers like Friday’s personal consumption expenditures reading and more on the Sept. 6 nonfarm payrolls report for August.
“The Fed’s focus will be on the jobs front,” Bovino said. “They seem to be more attuned to whether the jobs side is getting a little bit weaker. I think that’s the focus of their monetary policy.”
In addition to Friday’s inflation reading, there will also be a report on July personal income, which is expected to rise 0.2%, and consumer spending, which is forecast to rise 0.5%.
