Will Thursday’s PCE figure make Fed’s road bumpier?

In case inflation unexpectedly makes a comeback, the world’s largest central banks will carry out their mandated duties and fight back. This has obviously become a main concern since the beginning of 2024. In order to return US inflation to low pre-pandemic levels, the US central bank is likely to encounter some difficulties. The PCE index, which is the Fed’s preferred inflation indicator, is anticipated to show a higher rate of price growth in January than the central bank is comfortable with.

This comes after wholesale and consumer prices rose more sharply last month, casting doubt on the inflationary trend. According to some Fed officials, the road to their 2% inflation target is “bumpy.” Whether that picture is set to get bumpier will depend on new data that is expected out on Thursday morning.

The “core” Personal Consumption Expenditures (PCE) Index, the Fed’s favoured inflation gauge, is predicted by economists to register 2.8% year over year in January. This would be just less than the 2.9% annual growth that was reported in December.

However, the month-over-month increase expected by economists is 0.4%, up from the 0.2% seen in December. This could stoke fears that inflation is not moving down quickly enough and could also bring the six-month and three-month annualized inflation numbers back above the Fed’s 2% target, according to Bank of America.

The new PCE reading is important for investors as they try to determine how quickly the central bank will begin loosening its monetary policy following the most aggressive campaign to cool inflation since the 1980s. Markets began the year betting on six cuts starting in March, only to revert to three cuts starting in June following cautious commentary from Fed Chair Jerome Powell and other Fed officials, along with higher-than-expected readings on inflation. If the PCE number is indeed high and US jobs numbers continue to outperform expectations, it’s possible the Fed could decide to keep rates higher for longer.

Fed officials have expressed caution about the release of the Core Personal Consumption Expenditure (PCE) gauge, which will be released by the US Bureau of Economic Analysis (BEA) on Thursday, February 29 at 13:30 GMT.

Fed governor Michelle Bowman stated that the Fed is not yet ready to begin lowering rates and that reducing rates too quickly could require a rate hike later. She is also willing to raise rates if progress on inflation stalls or reverses. Kansas City Fed president Jeff Schmid said in his first-ever speech since taking the role last year that “when it comes to too-high inflation, I believe we are not out of the woods yet.”

The decline so far has been driven by a drop in the prices of goods as supply chains have healed from the wounds of the pandemic. Schmid also believes that the prices of services, which comprise two-thirds of consumer spending, continue to rise quickly amid a strong job market and higher wage growth.

Some economists expect PCE to have risen 36 basis points month over month in January while declining year over year to 2.8%. The data is already embedded in Fed officials’ views and that some officials are sounding more cautious about imminent rate cuts in response to the stronger-than-anticipated data releases to start the year.