Forget the CPI: Zoom in on the PCE Price Index, Particularly the Core Measure

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Do you know that the headline Personal Consumption Expenditures (PCE) was 2.4% in January while the core PCE was 2.8%? This is very close to the 2% target. We are not saying the road ahead is not going to be bumpy for markets and for the Federal Reserve (Fed), but there is light at the end of the tunnel.

Since the start of the post-pandemic inflationary burst markets and analysts have been looking at both, the headline Consumer Price Index (CPI), and the headline PCE price indices. However, today, the Fed has a much more important concern than the headline PCE price index (and it actually could not care less about the headline CPI for policymaking). Although the headline PCE price index is important, it has a much more important concern.

The most important indicator for the Fed today when deciding when to start lowering interest rates would be the behavior of core inflation numbers, that is, inflation indices that do not include volatile food and energy prices. But particularly, it is going to look at what is happening to the core PCE price index while markets are probably going to use the core CPI price index to get a hint of what is going to happen to the core PCE price index, as these indices are released with about 15 days difference, which has made the CPI a ‘favorite’ for market analysts and reporters.

PCE Price Index Vs Core PCE Price Index