The Fed’s preferred inflation measure gives it no room for a rate cut
Tiana Lowe
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Let us start with the good news because there isn’t much of it. The PCE index rose by 5% from the year before, slightly below expectations. Core PCE, the Fed‘s preferred inflation measure which excludes the volatile categories of food and energy, rose by 4.6%, a tick below January’s acceleration to 4.7%.
Dig into the numbers, however, and realize that there is no room not only for the rate cut investors are clamoring for but also for the Fed to hold rates and reach their projection of 3.3% average PCE inflation for the year. Breaking down the PCE indices into annualized rates over shorter time spans gives us a better picture of inflation’s momentum — and it’s clearly not following where the Fed wants.
INFLATION DIDN’T SLOW AS MUCH AS ECONOMISTS THOUGHT
Headline inflation over the previous three months on an annualized basis is 4.2%, a tad higher than the rate over the previous six months but much lower than the 5% figure for the full year. Core inflation is a different story.
Core PCE inflation over the previous three months on an annualized basis is 4.9%, much higher than both the 4.6% rate for the full year and the 4.5% annualized rate for the previous six months. Recall that the Fed projects that core PCE inflation will average 3.6% for the entire year. In order to achieve that, we would require multiple months of core PCE prints coming in at below 3%, a statistical improbability at this point.
Could there be a rapid decline? The category breakdown doesn’t bode well for that chance.
Core services — a meaningful measure because service prices are far stickier than goods — are up 5.5% for year, an increase from 5.4% in January. Housing is up 8.2% in February compared to 8% last month. But even core PCE services minus housing is up 4.64% from 4.6% in January.
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Measuring the past three months on an annualized basis illustrates the immediacy of the problem. Core services excluding housing is then 4.7% in February, up from 3.8% in January.
Headline inflation may look like it is finally stagnating again, but the Fed’s favorite measures lend no credence to the delusion that a rate cut is on the way.