The Federal Reserve’s preferred measure of price increases is set to show that inflation continues to fall, supporting the hypothesis that the central bank may soon ease up on its battle against high prices.
According to consensus estimates by economists polled by FactSet, the main price index of personal consumption spending is expected to have risen 4.4% year-on-year in December, a slight slowdown from 4.7% growth in December. November. On a monthly basis, the index is expected to have increased by 0.3%. This index, also known as the PCE core deflator, measures the prices US consumers pay for goods and services, excluding food and energy.
Meanwhile, the PCE headline deflator, which includes food and energy, is estimated to be unchanged month-on-month. Both measures are expected to be released on Friday at 8:30 am Eastern.
The indicators should confirm recent consumer-level data suggesting that inflation is past its peak. This should ease some pressure on the Fed, which has embarked on a determined campaign of tightening financial conditions over the past year to combat rising consumer prices. It should also ease the pressure on investors: The Fed’s seven interest rate hikes in 2022, including the largest in decades, have been a major headwind for the stock market, with the
plummeting nearly 20% in 2022.
However, Fed officials have cabled that fighting inflation remains a priority and that the central bank will continue to hike interest rates in 2023. January 31 and February 1. This would mark the central bank’s smallest rate hike since it began tightening financial conditions last March. The PCE printouts will be the last pieces of holistic inflation data Fed officials review before that monetary policy decision.
Investors are entering Friday with at least some clarity, because quarter-level PCE data was included in the fourth-quarter US gross domestic product report released on Thursday.
Core PCE increased by 3.9% in the fourth quarter of 2022, according to the GDP report. While there could be revisions to November’s data affecting that figure, analysts are still able to crunch the numbers to produce a December estimate. It seems the consensus is about the point.
“Core PCE data implies a 0.28% increase in the December number, in line with the consensus for tomorrow’s report, but that assumes no revisions to previous data,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. in a note. “We expect a 0.2% increase in December and a small upward revision through November. Either way, the trend is slowing down.
While the PCE is the Fed’s preferred measure of inflation, it doesn’t offer the whole story as the central bank ponders its monetary policy path forward. Fed Chairman Jerome Powell and other officials said they are also closely watching tension in the job market as a barometer for the health of the US economy. Weekly jobs data released on Thursday confirmed that jobless claims continue to fall and Fed officials may also revise the Labor Cost Index (ECI) data on Jan. 31, the day before announcing their next decision on rates.
“It is difficult to see unemployment rising to the rate required to moderate wage inflation at these levels of growth,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, in a statement after the Thursday’s GDP release. “We need activity weakness to translate into job losses to address Powell’s favorite services ex-haven inflation metric, where wages are the primary driver.”
Email Jack Denton at [email protected]