The Fed’s about to get its preferred measure of inflation. Here’s what it could mean.
The Fed’s about to get its preferred measure of inflation. Here’s what it could mean.
The Federal Reserve is about to learn how its preferred measure of inflation fared in September: On Thursday, the Commerce Department releases the latest Personal Consumption Expenditures price index, the last reading the central bank will get before it meets to set interest rates next week.
From the same month one year ago, the PCE price index for August increased 2.2%. Prices for goods decreased 0.9% and prices for services increased 3.7%. This could be the week when inflation hits the Fed’s sweet spot of 2%.
“You know, we’re getting back to where we should be,” said Alan Detmeister, an economist for UBS who used to work for the Fed.
He expects the PCE price index for September to come in around maybe 2.1% or 2%, adding that’s largely due to recent declines in energy prices — specifically, gasoline.
But don’t get used to that 2%, he said. “We’re expecting it to bounce back up over the next handful of months.”
That’s because Detmeister doesn’t expect energy prices to keep falling the way they have been, though he believes the overall trajectory of inflation is on track.
That’s the good news, said Belinda Román, a professor of economics at St. Mary’s University in San Antonio, Texas. “The maybe not so good news is what’s inside of it.”
If you look at the make up of the most recent PCE price index, you can see that in August, prices for services were up nearly 4% over last year. A lot of that is due to housing, where prices have been slow to come down.
Also, services tend to require a lot of labor, and after a few years of a tight job market, wages have gone up in many service sectors. Those wages “tend to be sticky and that also contributes to a little bit of inflation,” Román noted.
So, figuring out where wages are going is an important part of figuring out where inflation is going.
To get a feel for that, Don Kohn, who was a member of the Federal Open Market Committee — which actually sets interest rates — said he expects Fed policymakers will be watching the employment cost index, which is also out on Thursday.
“You get a sense of how wages are moving for the same job over time,” said Kohn.
There’s no formula for figuring out if and when the Fed will cut rates again and by how much, he added. Policymakers don’t look only at the headline number for the PCE, they’ll look at the entrails of it too: the costs of services, food, energy. And they’ll pay particular attention to the trend lines.
And UBS economist Alan Detmeister said that while getting to 2% inflation matters for the Fed’s credibility, it’s not a magic number.
“The economy does run as well with inflation at 1% as it does at 3%,” he said.
As long as inflation is low and relatively stable, Detmeister added that that’s really what matters.
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