The Focus This Week: Inflation And Expectations
The consumer price index (CPI) tends to grab the headlines, but when it comes to inflation gauges, the Federal Reserve’s (Fed’s) favoured the personal consumption expenditures report forever. And that’s because the PCE, as it’s known, covers a broader range of items and actually adjusts to how folks spend – for example, when they choose a substitute because a price has gone up. It also factors in data acquired by surveying businesses. So it’s more useful than the old CPI, which is a pure-and-simple record of the cost of a set basket of goods.
The PCE’s all-items inflation rate peaked at 7.2% in 2022 but has hovered between 2% and 3% since. Economists expect September’s pace to sit at 2.8%, up from August’s 2.7%. That’s the bad news. The good news, however, is that they expect the core measure – which strips out volatile stuff like food and energy to give a better idea of underlying price pressures – to dip to 2.8% from 2.9%.
Still, inflation’s stuck above the Fed’s 2% target, and more importantly, people are starting to expect that it will continue to linger. And that’s a problem. When people and businesses anticipate higher prices, they act accordingly – asking for bigger wages, raising prices earlier, and rushing to buy things before costs increase. All of that can turn inflation into a self-fulfilling cycle.
That’s why traders will also be watching the US consumer sentiment report (due Friday, too), which includes closely watched inflation expectations. If those jump or inflation runs hotter than forecast, the Fed just might rethink its rate-cutting game plan.
The central bank has lowered interest rates twice this year in response to a softening labour market, and traders are betting on another cut next week. But any hint that inflation might be picking up speed would complicate those plans, forcing policymakers to weigh the trade-off between supporting the job market with lower borrowing costs and reigniting price pressures as a consequence.
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