Experts predict continued high inflation levels in Fed’s favored indicator
Fed’s Preferred Inflation Gauge Seen Staying Elevated
The Federal Reserve’s preferred measure of underlying price pressures will likely remain elevated in February, causing concern among policymakers. According to the Bloomberg survey median, the US personal consumption expenditures price index, excluding food and fuel, is expected to rise 0.4% from a month earlier. This follows the most significant advance since June. However, compared with February 2022, the core inflation gauge is up 4.7%, while the overall measure is projected to post a 5.1% advance—more than double the Fed’s goal. This has left officials in a precarious spot as they seek to balance inflation-fighting resolve and stress on the banking system.
Balancing Inflation and Banking
The US government’s data, expected to be released on Friday, is also likely to show inflation-adjusted personal spending declined in February after surging a month earlier. Policymakers raised their benchmark interest rate for the ninth straight meeting on Wednesday to the highest since 2007 but stressed that their bid to tamp down inflation isn’t expected to deepen a budding banking crisis. Nevertheless, rising borrowing costs risk adding to the pressure on the financial system, which could tip the economy into a recession.
What Bloomberg Economics Says
Bloomberg economists believe that the sticky component of inflation has been running steadily at 4%-5% over the past few months, according to Fed Chair Jerome Powell’s preferred ‘super core’ inflation indicator – core PCE services excluding housing. This is not an encouraging sign of progress on disinflation.
The Upcoming Week
The coming week will see a subdued week for US economic releases, which includes readings on consumer confidence, home prices, and contract signings for purchases of previously-owned houses. Investors will pay closer attention to Fed officials to gauge the appetite for further rate hikes. Fed Governor Philip Jefferson, Boston Fed President Susan Collins, Richmond Fed President Tom Barkin, and Governors Christopher Waller and Lisa Cook will speak on monetary policy.
- Canadian Finance Minister Chrystia Freeland unveils a federal budget in North America, promising prudence while under pressure to ramp up spending on clean-technology incentives to stay competitive with the Biden administration’s generous new industrial policy in the US.
- Euro-zone inflation data are expected to reveal conflicting signals on price growth.
- Central-bank decisions may feature rate hikes from South Africa to Mexico.
- The Federal Reserve struggles to balance inflation fighting and banking stress as its preferred inflation gauge remains elevated.
- Personal spending declined in February, and rising borrowing costs risk adding to the pressure on the financial system that could tip the economy into a recession.
- Bloomberg economists suggest that the sticky component of inflation has been running steadily, which is not a good sign of progress on disinflation.
The Federal Reserve is between a rock and a hard place as it seeks to balance rising inflation with financial stability. The elevated inflation gauge is a concern, and while the Fed is trying to combat this, they are hesitant to add to the burden on the banking system. As a result, investors are observing to see what the Fed will do next, as the coming weeks will be critical in determining the road ahead for the US economy.