Summary
The Fed’s favorite inflation indicator, the PCE Price Index, will be released on Friday. The index differs from the better-known Consumer Price Index (CPI) because its composition is changed more frequently and it is thus quicker to reflect real-time pricing fluctuations. In the most-recent report, PCE inflation reportedly increased at a 2.6% rate year over year through July. By comparison, the latest CPI report, through July, had overall inflation rising 2.9%. Core PCE, which removes volatile food and energy prices, had risen at an annual rate of 2.9% in the latest month. Our PCE forecasts call for mostly stable readings for August: 2.8% for the headline number and 3.0% for the core reading. We think lingering inflation in certain sticky-priced services (transportation and shelter) will combine with tariff impacts to present a challenge for the Fed as it strives for its 2% goal. Overall, inflation in this cycle peaked in summer 2022 and has been on a fairly consistent downward trek since then. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.7% rate year over year, up slightly compared to the month-ago level. The numbers are volatile and can be distorted by swings within the Producer Price Inflation report. Focusing on core inflation — which we obtain by averaging Core CPI, market-based PCE Ex-Food & Energy (from the GDP report), the fiv