Inflation’s Slow Crawl: Will It Meet the Fed’s Target?


Inflation’s Easing Steps: A Brighter Hope for Consumers

Inflation, the economic ogre that has been haunting consumers, is showing signs of timid retreat. According to the LA News Center, a report expected this Friday indicates that the struggle against rising prices is gradually gaining ground.

Modest Progress Towards the 2% Target

The Commerce Department’s Personal Consumption Expenditures (PCE) price index, a gauge of inflation, is projected to reveal an annual rate of 2.7%, embodying a slight dip for the core rate, excluding volatile food and energy components. These figures mirror the expectations of economists, who anticipate both an annual and monthly decline in inflation.

An easing of 0.2% in core inflation would suggest a further step towards alleviating the financial burden on weary consumers. Nonetheless, the report scheduled for release at 8:30 a.m. ET is expected to portray a gradual return to the Federal Reserve’s elusive 2% target.

The Fed’s Puzzle Piece: Super-Core Inflation

The Fed, in its relentless pursuit of inflation control, has embarked on a detailed data analysis journey. One recent innovation is the “super-core” inflation level, which monitors service costs (sans food, energy, and housing) to predict long-term trends.

However, the Fed’s hopes for a cooldown in housing inflation this year have been dashed, adding another layer of complexity to the debate. Furthermore, the Fed’s preference for PCE inflation over the more popular Consumer Price Index (CPI) has stirred some intrigue.

PCE vs. CPI: Tale of Two Measures

The CPI, monitored by the Labor Department, has consistently exhibited higher inflation trends, with overall inflation reaching 3.4% in April and core inflation at 3.6%. The discrepancy arises from the PCE’s methodology, which attempts to account for consumer behavior shifts, such as the substitution of cheaper products.

The Fed favors the PCE measure as it provides a more accurate representation of the living cost burden. However, the public’s familiarity with the CPI ignites the question of which metric truly reflects the consumer experience.

Rate Cuts Dilemma

Inflation readings have a profound impact on markets, especially as they sway the Fed’s interest rate decisions. The consensus among the futures markets suggests just one rate cut in 2024, possibly in November. However, a surprise divergence in the PCE report from CPI trends might trigger market expectations for additional cuts.

New York Fed President John Williams anticipates a further decline in PCE inflation to around 2.5% by year-end, ultimately reaching the 2% target in 2026. His optimism rests upon the belief in economic supply chain improvements and productivity enhancements.

As the battle against inflation continues, the PCE report emerges as a crucial indicator. It will unveil the latest progress towards the elusive 2% target, potentially influencing the Fed’s monetary policy decisions and providing a glimmer of hope to inflation-weary consumers.