Federal Reserve officials will get a fresh look at their preferred inflation gauge on Friday, a data point that could influence the September rate decision, even as their focus appears to be shifting elsewhere.
The Commerce Department will release its personal consumption expenditures (PCE) price index at 8:30 a.m. ET, providing a comprehensive view of what consumers are paying for a wide range of goods and services, as well as their spending habits.
While the Fed considers multiple indicators to assess inflation, the PCE index is its primary data point and the sole forecasting tool used when members release their quarterly projections. Policymakers particularly focus on the core PCE measure, which excludes food and energy, when making interest rate decisions.
The Fed favors the PCE over the Labor Department’s consumer price index (CPI) because it accounts for changes in consumer behavior, such as substituting purchases, and offers a broader view of inflation.
For the July report, the Dow Jones consensus expects little change from recent trends — a 0.2% monthly increase in both headline and core prices, with annual gains of 2.5% and 2.7%, respectively. At the core level, the 12-month forecast actually suggests a slight uptick from June, while the all-items measure remains unchanged.
If the data aligns with forecasts, it is unlikely to deter Fed officials from moving forward with a widely anticipated interest rate cut at their September 17-18 policy meeting.
While Fed officials aren’t declaring victory over inflation just yet, recent statements suggest a more positive outlook. The central bank targets 2% inflation annually, and although PCE readings have not been below that level since February 2022, Fed Chair Jerome Powell recently said that “my confidence has grown” that inflation is on track to return to target. However, Powell also expressed concerns about the slowing labor market, signaling that the Fed may be shifting its focus from fighting inflation to supporting employment.
“The upside risks to inflation have diminished, and the downside risks to employment have increased,” Powell noted.
This shift is being interpreted as a sign that policymakers are now more concerned with preventing a labor market downturn and a broader economic slowdown. Consequently, less emphasis might be placed on numbers like Friday’s PCE reading, with more attention likely directed toward the September 6 report on August nonfarm payrolls.
“The Fed’s focus is going to be on the jobs front,” Bovino added. “They seem to be more attuned to whether the job market is weakening. I think that’s where their monetary policy focus lies.”
In addition to Friday’s inflation data, there will also be reports on personal income, expected to rise by 0.2%, and consumer spending, projected to increase by 0.5%.
