The Fed Comparing Two Measures of Core Inflation: PCE Excluding Food & Energy vs the Trimmed Mean PCE Index

Now, with the inflation rate cooling markets largely expect the Fed to start unwinding its policy tightening. As of Friday morning, futures traders were assigning about a best forex trading platform 53% chance the Fed will enact its first rate cut this cycle in March, according to CME Group data. Pricing points to six quarter-percentage point decreases this year.

  1. Since 2008, however, the difference has been smaller, 1.7 percent and 1.4 percent.
  2. The Federal Reserve’s preferred inflation metric revealed price pressures eased markedly in December.
  3. Previously, such solid news about economic growth would have rocked markets and raised concerns about when the Fed will begin to cut interest rates.
  4. Higher interest rates can attract capital flows and increase demand for the currency of the country with relatively higher rates.

Previously, such solid news about economic growth would have rocked markets and raised concerns about when the Fed will begin to cut interest rates. But investors took the news in stride, with the S&P 500 hitting another record high this week. Prior to this morning’s release, investors saw the odds of a rate cut in March at 48%, according to the CME FedWatch Tool.

Key differences between PCE and CPI as inflation measures

Inflation has been slowing swiftly, and fresh data showed that a core price gauge fell below 3 percent for the first time in years last month. One drawback of the PCE price index, however, is that it can be substantially revised, while the (non-seasonally adjusted) CPI is never revised. This could give an edge to the CPI for some purposes (e.g., contract indexation) and also explains its use for Treasury Inflation-Protected Securities (TIPS). For example, if rising gas prices lead consumers to drive less and cut down on fuel spending, the PCE will reflect that change in purchase frequency.

Blueberry Markets

The more widely known CPI shows higher inflation than the Fed’s preferred measure partly because it puts greater weight on housing and rents, whose prices are higher than for many other goods and services. Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well. In the U.S., for example, the government releases an annualized GDP estimate for each fiscal quarter and also for the calendar year. The individual data sets included in this report are given in real terms, so the data is adjusted for price changes and is, therefore, net of inflation.

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Personal consumption expenditures data provide a view of how the economy is faring. This information is important for economic policy purposes and business decision-making. In addition https://bigbostrade.com/ to progress on core, headline PCE inflation cooled 0.6 percentage points to 2.7% in the fourth quarter, the lowest pace of growth recorded since the first quarter of 2021.

Investing.com — The Dow closed lower Thursday, pressured by a Meta-led slump in tech as concerns about slowing advertising growth offset better-than-expected quarterly results. The weight effect leads to the maximum divergence between CPI and PCE, as the graph above illustrates. The Fed’s benchmark overnight interest rate is currently targeted between 5.25%-5.5%. Micron stock is set to struggle amid shrinking profit and revenue…

Core Inflation

First, in each month there is a wide distribution of price changes (Panel A of Figure 1); it is precisely this dispersion that makes it difficult for policymakers and others to interpret high-frequency inflation readings. Second, the index excluding food and energy and the trimmed-mean measure are both considerably less volatile than the total PCE price index. It is crucial to measure core inflation because it reflects the relationship between the price of goods and services and the level of consumer income. If prices for goods and services increase over time but consumer income doesn’t change, consumers will have less purchasing power.

The marked drop in savings indicates that consumers likely are dipping into savings to fuel spending. The most recent PCE price index data was released on January 26, 2024, covering the month of December 2023. The headline December PCE inflation figure was +2.6% year over year, which is the same as the annual rate of +2.6% in November. The CPI and PCE do not cover identical categories of personal spending.

According to the Bureau of Economic Analysis (BEA), a U.S. government agency, PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP). However, there are signs that economic growth will likely slow further. In the first half of this year, economists surveyed by FactSet expect GDP growth to slow to 0.8% in the first quarter and 0.6% in the second quarter. The personal savings rate fell to 4% in the fourth quarter, down from the 4.2% rate logged in the third quarter, an indication that some consumers are dipping into savings to fuel spending. Although both measure inflation, the PCE price index and the CPI are calculated differently and have different scope. CPI measures out-of-pocket expenditures of all urban households, while the PCE index measures the change in goods and services consumed by all households, including nonprofit institutions.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index. Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the number of goods or services you would be able to purchase. The S&P 500 has made multiple new all-time highs and Wednesday’s late-day reversal raised questions about the current phase of the rally.

Sign up for our monthly newsletter to get the latest research, expert interviews, and upcoming events from the Cleveland Fed. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. The largest contributors to the increase in goods spending were motor vehicles and parts, particularly sales of light trucks.

However, over the previous six years or so the measure excluding food and energy delivered a more accurate forecast of total inflation. In conclusion, from the point of view of forecasting future inflation, there is no clear advantage of one measure over the other. As is apparent from the figure, the magnitude of the revisions to these inflation measures can be sizable at times.

Core PCE data helps central banks make informed decisions about monetary policy adjustments to manage inflationary pressures and support economic stability. The Core PCE reflects the percentage change in the price index over a specified period, typically monthly or quarterly. When the Core PCE reading surpasses expectations, it tends to have a positive (bullish) impact on the USD as it indicates a strong US economy and vice versa. Core PCE (Personal Consumption Expenditures) provides traders with valuable insights into inflationary pressures and anticipates potential changes in currency values. Monitoring Core PCE data enables traders to align their strategies with central bank policy shifts, improving their decision-making and potential market gain. The Fed too has given preference to PCE due to its broader scope and “chained base” for calculations.

It’s used to calculate inflation (or deflation) in the U.S. economy. The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures index, should show continued progress on the central bank’s goal of 2% price growth when it’s released Friday. Inflation rates tend to exhibit both temporary and persistent movements. Because economists often are interested in the persistent movements in inflation, they have proposed a number of measures to capture this particular component, which can be thought of as the inflation trend or underlying inflation.