PCE Price Index Preview: Fed Still Stuck in the Last Mile of Lowering Inflation

The Bureau of Economic Analysis will release the Personal Consumption Expenditure and the price index at 8:30 ET on Friday. The previously announced CPI price for August showed core inflation continued declining but headline inflation ticked up again.

A few signals indicate that a new round of inflationary pressure is rising, but many economists seem to ignore them, although some Fed officials are wary about prematurely declaring that inflation has slowed.

Federal Housing Finance Agency's House Price Index (HPI) Monthly Report released on Sept. 23 showed that American housing prices are accelerating again. The index increased by 0.8% in July versus the predicted +0.4%.

S&P CoreLogic Case-Shiller Home Price Index released on the same day showed that the US National, 10-City and 20-City Composites all posted a 0.6% month-over-month increase in July.

Craig J. Lazzara, Managing Director at S&P, said “We have previously noted that home prices peaked in June 2022 and fell through January of 2023, declining by 5.0% in those seven months. The increase in prices that began in January has now erased the earlier decline, so July represents a new all-time high for the National Composite. Moreover, this recovery in home prices is broadly based. As was the case last month, 10 of the 20 cities in our sample have reached all-time high levels. In July, prices rose in all 20 cities after seasonal adjustment.”

The average price of a gallon of regular gasoline was $3.84 in August compared with $3.60 in July, according to OPIS, an energy data and analytics provider. Pump prices have held nearly steady in September.

Energy and food prices heavily influence the way many Americans view inflation and can affect their behavior, including the wages they demand from employers. Recently reached labor contracts in the airline and healthcare industries will boost pay for some workers at a time when the Fed is seeking a slowdown in wage growth to help cool inflationary pressures.

Higher energy costs can also feed into prices of non-energy goods and services. When they were falling until recently, transportation services helped drive tamer core inflation readings, but that could be at risk if energy prices keep rising. Last month, airline fares rose 4.9% after steep declines earlier in the summer.

WSJ's Nick Timiraos noted in his recent article that some Fed officials suggest the central bank could take a lesson from former Fed Chair Alan Greenspan and get to its 2% target more leisurely. Greenspan in the early 1990s charted an approach later dubbed “opportunistic.” Rather than push immediately for 2%, get there gradually over several years by holding rates at a level that could seem slightly higher than they need to be, and letting opportunities, such as the occasional economic slowdown, nudge inflation down bit by bit.

However, the Fed under Greenspan didn't have a publicly stated inflation goal. Congress charged the Fed with achieving “price stability,” but Greenspan never defined the term, which made it easier to cut rates to support a weak economy even if inflation was higher than desired. Under Greenspan's successor, Ben Bernanke, the Fed adopted its official 2% inflation target in 2012.

Former Fed economist Riccardo Trezzi recreated the Fed's main inflation forecast model, and the core inflation rate in 2025 may still be as high as 2.7%. This means inflation, along with uncertainties of recession, now put the Fed in a dilemma. The Fed seems to have to choose between a soft/hard landing and a second round of inflation.

Now CME FedWatch showed the probability of rate hiking in the coming FOMC meetings is 22.38% in November and 42.16% in December. This indicates that the market may not have fully grasped the immediacy of additional rate hikes, and any developments that sustain or increase interest rates could exacerbate the instability of the stock markets, which have been notably volatile as of late.