The Fed’s preferred measure of price growth would signal that the fight against inflation is back on track after a summer setback. This would be an encouraging sign for the market given the uncertainty over the interest rate outlook.
The core personal consumption expenditure index (core PCE deflator) is expected to rise 3.9% year-on-year in August, remaining at its lowest level since September 2021, according to a FactSet survey of economists. Core PCE at this level would be an encouraging return to the general downward trend after inflation, which excludes changes in food and energy costs, rose from 4.1% in June to 4.2% in July. right.
The announcement is scheduled for 8:30 a.m. ET on Friday and will come in response to markets that have been on edge for more than a week since the Fed’s latest monetary policy decisions. The central bank kept interest rates on hold on September 20, but signaled that borrowing costs may need to rise further to adequately contain inflation.
That message sent stock prices lower and bond yields soared. The yield on the 10-year Treasury note, the benchmark U.S. mortgage, rose to more than 4.6%, its highest level since 2007.
“Chairman Powell called the recent inflation report ‘good’ in his press conference last week, but more reports are needed before the Fed can fully agree to halt rate hikes,” said Tom Essay, founder of Sevens Report Research. “I said it was necessary,” he said. “If Friday’s core PCE price index is subdued, the Fed could release another ‘good’ report and ease some of the Fed-based fears gripping the market.”
Key PCE inflation rates, including food and energy prices, may tell a different story. Economists expect the measure to rise 3.5% in August, up from 3.3% in July and 3% in June.
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Inflationary pressures are again visible in the Consumer Price Index and Producer Price Index. The main reason is the rise in energy costs in recent months. West Texas Intermediate crude oil futures, the benchmark U.S. market, rose this week to their highest level in more than a year, at one point topping $95 a barrel.
Nevertheless, Friday’s data will support the view that the fight against inflation is coming to an end as price increases move back towards the Fed’s 2% annual target. Interest rate futures currently reflect a one in three chance that the bank will raise rates again between now and mid-December.
PCE’s core data could either solidify that dovish view or confuse it.
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Email Jack Denton at jack.denton@barrons.com.
