(Bloomberg) - The surprise jump in the January consumer price index probably will be less pronounced in the Federal Reserve’s preferred inflation gauge and potentially less alarming to central bank officials as they weigh when to cut interest rates.
Based on the latest CPI figures, the personal consumption expenditures price index excluding food and energy — due from the Bureau of Economic Analysis on Feb. 29 — probably rose 0.29% last month, Morgan Stanley economists said Tuesday in a note to clients.
Such an increase would boost the three-month annualized rate for the so-called core PCE index to 2.1% from 1.5%, and the six-month rate to 2.2% from 1.9%, according to Bloomberg calculations. Fed officials have trained focus on such measures in recent months as inflation has moderated.
“The acceleration in core PCE is aligned with our view of a bumpy path ahead,” the Morgan Stanley team, led by Ellen Zentner, said in the note. “This acceleration will be one factor delaying the decision to start cutting rates to June this year.”
The CPI data, published Tuesday by the Bureau of Labor Statistics, showed prices excluding food and energy rose 0.4% in January, topping most forecasts. The surprise strength was concentrated in core services, which rose 0.7% in the biggest increase since September 2022.
Many of the components of the CPI feed into the PCE index as well, but there are some key differences. Shelter, which was the largest driver of the increase in the CPI, has a lower weight in the PCE. Medical care services, which were an important source of strength in the CPI, are calculated in the PCE using different inputs altogether.
Those differences are keeping inflation as reported by the core CPI well above that in the core PCE index. At the end of 2023, the spread between the year-over-year rates of change of the two gauges was a full percentage point, more than three times the average over the last 20 years.
The PCE index also uses inputs from the producer price index, which the BLS will publish on Friday.
What Bloomberg Economics Says...
“Notably, transportation services (particularly airfare) and vehicle insurance and repairs drove the increase. Medical-care services also surprised on the upside. It’s important to note that the PPI version of airfares (due Feb. 16) and medical care for January enters into the Fed’s preferred inflation measure, the core PCE deflator. Thus it’s possible that the increases in CPI services won’t map into that measure.”
— Anna Wong and Stuart Paul, economists
One big wild card to watch out for in that report is the portfolio management services component, which follows stock-market movements with a lag and could get a big boost from the market rally in the fourth quarter, according to Omair Sharif, president of Inflation Insights.
If it does, a 0.4% increase for the core PCE index in January “is not out of the question,” though “after that, I think we should definitely kind of settle back” to monthly increases closer to 0.2% as services inflation continues to moderate, he said.
That would boost the three-month annualized rate as high as 2.8% by March, before plummeting to 1.7% in April. The year-over-year rate would fall to the Fed’s 2% target by May or June.
“At that point, given the trajectory, you would be pretty confident cutting,” Sharif said. “It’s just not a straight-line path, like today obviously proves.”
(Updates with comments from Sharif beginning in ninth paragraph.)
By Matthew Boesler
