The PPI data for December came in lower than expected:
Good news? Yes…but yes but. The components that feed into core PCE (PCE as the Federal Reserve's preferred measure of inflation – more on this below if you're interested) are going higher.
December's PCE inflation data will be influenced by the PPI inflation report:
- Citi now expects core PCE inflation (excluding food and energy) to rise 0.21% month-on-month in December, slightly higher than its previous estimate.
- Similarly, Morgan Stanley has raised its projection to 0.23%. This indicates a possible acceleration compared to the 0.1% increase in November.
- Some Fed officials are aiming for 12-month core PCE inflation to slow closer to the 2% target before they cut interest rates.
The PCE data will be released on January 31. Ahead of that is CPI inflation data, due Wednesday, January 15, 2025 at 8.30am US Eastern Time (1330 GMT):
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In summary, the PCE's broader coverage, flexibility, and regular updates make it a more accurate and stable indicator for the Fed to assess inflation and effectively guide monetary policy.
Compare with CPI
| Feature | PCE | CPI |
|---|---|---|
| Scope | Wider (all households and institutions) | Narrower (urban houses only) |
| Weight updates | Constant weights (dynamic weights) | Less frequent (fixed weights) |
| Substitution effect | Accounts for an agent | Limited accounting |
| volatility | Less variable | More complex |
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If you want even more…
The Federal Reserve prefers the Personal Consumption Expenditure (PCE) Price Index. as the main measure of inflation because it offers a broader, more accurate and more flexible view of consumer spending and price changes. Here are the main reasons:
1. Comprehensive coverage of Products and Services
- The PCE captures a more comprehensive range of goods and services than the Consumer Price Index (CPI), which focuses on urban households.
- It includes spending by individuals and institutions, such as spending on behalf of households with employers or government programs such as Medicare and Medicaid.
2. Changing consumer behavior
- The accounts are for PCE substitution effects– when consumers switch to cheaper alternatives as prices rise. This reflects real world behavior more accurately than the CPI, which uses a fixed basket of goods and services.
- This dynamic change makes the PCE less volatile and more reflective of consumer buying patterns.
3. Regular weight
- The PCE uses current cost pressureswhich are regularly updated to reflect changes in consumer habits. In contrast, the CPI uses fixed weights that are not updated as often, which can make it slower to adapt to economic trends.
4. Scope and Data Sources
- The PCE is derived from business surveys, administrative data, and household surveys, providing a robust and comprehensive data set.
- The CPI relies heavily on household surveys, which can be less reliable due to sampling and reporting issues.
5. Major PCE for Policy Focus
- The Main PCE (with the exception of volatile food and energy prices) particularly useful for the Fed. It provides a clearer indication of core inflation trends, helping the Fed make informed policy decisions without having to deal with short-term volatility.
6. Alignment with the double mandate of the Deer
- The PCE aligns better with the Fed's dual mandate to promote price stability and highest earningsbecause it provides a more stable and long-term view of inflation trends.
