Federal Reserve officials will receive the most recent update on their preferred inflation gauge on Friday, potentially impacting the September rate decision despite their current focus being elsewhere. At 8:30 a.m. ET, the Commerce Department will unveil the personal consumption expenditures price index, a comprehensive measure of consumer expenditures on various goods and services and their spending habits.
Although the Fed uses multiple indicators to assess inflation, the PCE index is their primary data point and the sole tool for forecasting during quarterly projections. Policymakers pay particular attention to the core PCE measure, which excludes food and energy, when determining interest rate policies. The Fed favors the PCE over the Labor Department’s consumer price index due to its consideration of changes in consumer behavior and broader scope.
Market expectations for the July figures suggest minimal deviation from recent trends, with projected 0.2% monthly increases in both headline and core prices, and respective annual gains of 2.5% and 2.7%. Any slight deviations are unlikely to deter Fed officials from proceeding with an anticipated interest rate cut at the upcoming Sept. 17-18 meeting.
Fed Chair Jerome Powell’s recent statements reflect a more optimistic outlook on inflation, although he remains cautious about the labor market slowdown. The central bank aims for a 2% annual inflation rate, with recent PCE readings above this level since February 2022. Powell’s remarks suggest a shift in focus towards supporting employment rather than solely combating inflation.
This change in approach indicates a potential emphasis on preventing labor market deterioration and broader economic slowdown, possibly reducing the significance of data like the upcoming PCE report in favor of indicators such as the Sept. 6 release on August nonfarm payrolls. Alongside the inflation data, Friday will also feature reports on personal income, expected to rise by 0.2%, and consumer spending, projected to increase by 0.5%.
