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Forecast: Ebbing inflation

Core CPI, which excludes food and energy costs, is expected to rise 0.2% in January as it did in December with the annual rate slipping to 2.1% from 2.2%.  Overall inflation is predicted to decline 0.1% in January the same as December with annual price changes dropping to 1.6% from 1.9% in December

 

Core PCE versus Core CPI

The estimate for the Fed’s preferred inflation measure, the core personal consumption expenditures price index, core PCE for short, for 2019 was lowered in the Projection Materials to 2.0% from 2.1%. The overall PCE rate was adjusted down to 1.9% from 2.0%.

Core PCE is a more modern version of CPI. Its different composition results in a lower inflation rate.

 

Core PCE, CPI and the shutdown

The core PCE rate dropped from 2% in September to 1.8% in October and then bounced back to 1.9% in November.  The December and January PCE figures will not be released by the Bureau of Economic Analysis until March 1^st.

In lieu of the missing PCE numbers the core CPI figures for January take on greater importance.  The expected fall to 2.1% from 2.2% is an indicator of weakening price pressures particularly in light of the July peak at 2.4%.  The same decline will be assumed of the PCE numbers.

Inflation was not one of the Fed’s stated concerns in the December FOMC statement or the press conference comments of Chairman Powell.

If however, inflation retreats further from the 2% target the Fed’s pause will gain justification and the potential for second half rate hikes will become that much smaller.