Fed caution aligned with inflation internals, core PCE likely to be sticky

The Federal Reserve's latest meeting minutes underscored a cautious approach towards reducing interest rates too quickly, especially given the persisting tightness in the labour market and the yet-to-be-confirmed indications that inflation is on a consistent downward trajectory. This careful stance seems well justified when examining the internals of inflation and their alignment with the Fed's perspective.

Delving into inflation internals

By leveraging insights from Indicio and considering various factors, the US Core Personal Consumption Expenditures (PCE) Price Index for January 2024 is projected at 2.85%, slightly down from 2.9% in December 2023. However, the month-over-month increase is estimated at around 0.4%, higher than the 0.2% rise observed in December. This nuanced analysis sheds light on the intricate dynamics influencing inflation.

Various measures of core PCE and its composition

In December, Goods PCE was almost at 0, while Services PCE surged to 3.91%, pushing the overall core PCE to 2.9%. Other measures, such as the Cleveland Fed median inflation at 3.8%, the Trimmed mean 12-month at 3.3%, and the BEA’s market-based PCE at 2.95%, all hover above the Fed's 2% target. This suggests that, despite the slight decline, inflation pressures remain.

Expenditure and price decline dynamics

Cyclicality of inflation trends

The disparity between cyclical inflation at 5.4% and non-cyclical inflation at 1.5% in December underscores the dominant contribution of recent cyclical factors to the core PCE of 2.9%. Factors such as robust growth momentum, tight labour market conditions, and resilient consumer spending have exacerbated the cyclical component of inflation.

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