Economics
The Fed’s preferred inflation indicator is out Friday. What to expect
A customer shops at a supermarket on August 14, 2024 in Arlington, Virginia.
Sha Hanting | China News Service | Getty Images
Federal Reserve officials will get the latest look at their favorite inflation indicator Friday, a data snapshot that could influence the September rate decision even as policymakers appear to have their focus elsewhere these days.
The Commerce Department at 8:30 a.m. ET will release its personal consumption expenditures price index, a sprawling measure of what consumers are paying for a variety of goods and services as well as their spending preferences.
While the Fed uses a whole dashboard of indicators to measure inflation, the PCE index is its go-to data point and its sole forecasting tool when members release their quarterly projections. Policymakers especially hone in on the core PCE measure, which excludes food and energy, when making interest rate decisions.
The Fed prefers the PCE over the Labor Department’s consumer price index as the former takes into account changes in consumer behavior such as substituting purchases, and is broader.
For the July reading, the Dow Jones consensus sees little change in recent trends — 0.2% monthly increases in both headline and core prices, and respective gains of 2.5% and 2.7% annually. At the core level, the 12-month forecast actually indicates a slight bump up from June, while the all-items measure is the same.
Should the readings roughly match the forecast, they should do little to dissuade Fed officials from following through with a much-anticipated interest rate cut at their Sept. 17-18 policy meeting.
“To me, it’s going to be just one more piece of evidence to confirm that the Fed is seeing sustainable inflation readings at a sustainable pace,” said Beth Ann Bovino, chief economist at U.S. Bank. Any slight upticks are “really just base-effect kinds of things that aren’t going to change the Fed’s view.”
Fed officials aren’t declaring victory over inflation yet, though recent statements indicate a more positive outlook. The central bank targets inflation at 2% annually.
While the respective PCE readings haven’t been below that level since February 2022, Fed Chair Jerome Powell last week said that “my confidence has grown” that inflation is heading back to target. But Powell also expressed some reservations about the slowing labor market, and it appears the Fed now is tilting away from being an inflation fighter and focusing more on supporting the jobs picture.
“The upside risks to inflation have diminished. And the downside risks to employment have increased,” Powell said.
That view has been taken as an indication that policymakers will be focused more on preventing a labor market reversal and a broader slowdown in the economy. In turn, that could mean less of a focus on numbers such as Friday’s PCE reading and more on the Sept. 6 report on August nonfarm payrolls.
“The focus on the Fed is going to be on the jobs front,” Bovino said. “They seem to be more attuned to whether the jobs side is getting a little weaker. I think that’s the focus of their monetary policy.”
In addition to the inflation readings Friday, there will also be a look at personal income in July, which is expected to increase by 0.2%, and consumer spending, which is projected to rise 0.5%.
Hiring decreased just slightly in May even as consumers and companies braced against tariffs and a potentially slowing economy, the Bureau of Labor Statistics reported Friday.
Nonfarm payrolls rose 139,000 for the month, above the muted Dow Jones estimate for 125,000 and a bit below the downwardly revised 147,000 that the U.S. economy added in April.
The unemployment rate held steady at 4.2%. A more encompassing measure that includes discouraged workers and the underemployed also was unchanged, holding at 7.8%.
Worker pay grew more than expected, with average hourly earnings up 0.4% during the month and 3.9% from a year ago, compared with respective forecasts for 0.3% and 3.7%.
“Stronger than expected jobs growth and stable unemployment underlines the resilience of the US labor market in the face of recent shocks,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management.
Nearly half the job growth came from health care, which added 62,000, even higher than its average gain of 44,000 over the past year. Leisure and hospitality contributed 48,000 while social assistance added 16,000.
On the downside, government lost 22,000 jobs as efforts to cull the federal workforce by President Donald Trump and the Elon Musk-led Department of Government Efficiency began to show an impact.
Stock market futures jumped higher after the release as did Treasury yields.
Though the May numbers were better than expected, there were some underlying trouble spots.
The April count was revised lower by 30,000, while March’s total came down by 65,000 to 120,000.
There also were disparities between the establishment survey, which is used to generate the headline payrolls gain, and the household survey, which is used for the unemployment rate. The latter count, generally more volatile than the establishment survey, showed a decrease of 696,000 workers. Full-time workers declined by 623,000, while part-timers rose by 33,000.
“The May jobs report still has everyone waiting for the other shoe to drop,” said Daniel Zhao, lead economist at job rating site Glassdoor. “This report shows the job market standing tall, but as economic headwinds stack up cumulatively, it’s only a matter of time before the job market starts straining against those headwinds.”
The report comes against a teetering economic background, complicated by Trump’s tariffs and an ever-changing variable of how far he will go to try to level the global playing field for American goods.
Most indicators show that the economy is still a good distance from recession. But sentiment surveys indicate high degrees of anxiety from both consumers and business leaders as they brace for the ultimate impact of how much tariffs will slow business activity and increase inflation.
For their part, Federal Reserve officials are viewing the current landscape with caution.
The central bank holds its next policy meeting in less than two weeks, with markets largely expecting the Fed to stay on hold regarding interest rates. In recent speeches, policymakers have indicated greater concern with the potential for tariff-induced inflation.
“With the Fed laser-focused on managing the risks to the inflation side of its mandate, today’s stronger than expected jobs report will do little to alter its patient approach,” said Rosner, the Goldman Sachs strategist.
Friday also marks the final day before Fed officials head into their quiet period before the meeting, when they do not issue policy remarks.
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