Customers shop at a supermarket in Arlington, Virginia, on August 14, 2024.
Sha Han Ting | China Newspaper | Getty Images
Federal Reserve officials will get an update on their favorite inflation gauge on Friday, and the data snapshot could influence their September interest rate decision, even though policymakers have seemed to be focused on other things lately.
At 8:30 a.m. ET, the Commerce Department will release the Personal Consumption Expenditures Price Index, a broad measure of how much consumers are paying for various goods and services and their spending preferences.
While the Fed uses a variety of measures to measure inflation, the PCE measure is the central bank’s go-to data point and the only forecasting tool its members use when issuing their quarterly forecasts. Policymakers pay particular attention to the core PCE measure, which excludes food and energy, when making interest rate decisions.
The Fed prefers PCE to the Labor Department’s Consumer Price Index because it is broader, taking into account changes in consumer behavior such as substitution purchases.
Looking at the July readings, the Dow Jones consensus is for little change to recent trends, with both the composite and core indices up 0.2% for the month, and up 2.5% and 2.7% for the year, respectively. For the core index, the 12-month forecast is a slight increase from June, while the composite is flat.
If the numbers are roughly in line with expectations, they will be unlikely to deter Fed officials from delivering a much-needed rate cut at their Sept. 17-18 policy meeting.
“To me, this is just another piece of evidence that the Fed thinks inflation measures are stabilizing at a sustainable pace,” said Beth Ann Bovino, chief economist at U.S. Bank. The slight increase “is really more of a base effect and doesn’t change the Fed’s view.”
Federal Reserve officials have yet to declare victory over inflation, but recent statements have painted a more optimistic picture: The central bank is targeting inflation at 2% per year.
While the respective PCE measures have not fallen below that level since February 2022, Fed Chairman Jerome Powell said last week he has “increased confidence” that inflation is on track with its target. But Powell has also expressed concern about a slowing labor market, which appears to be shifting the Fed away from fighting inflation and toward a focus on supporting the employment situation.
“Upside risks to inflation have decreased, while downside risks to employment have increased,” Powell said.
The view is being taken as a sign that policymakers will be focused on preventing a labor market turnaround and an overall economic slowdown, which could mean more emphasis on August nonfarm payrolls, due on Sept. 6, than on numbers like Friday’s PCE reading.
“The Fed’s focus is going to shift to the employment issue,” Bovino said. “The Fed seems to be more sensitive to whether employment is weakening a little bit. I think that’s going to be the focus of the Fed’s monetary policy.”
In addition to Friday’s inflation reading, attention will also be focused on personal income, which is expected to increase 0.2% in July, and consumer spending, which is expected to rise 0.5%.
