Jay L. Clendenin / Getty Images
Key Takeaways
- According to PCE’s estimates, inflation remained stubborn in February. This is in contrast to another measure which showed a deceleration.
- PCE inflation measures prices differently from the widely-watched Consumer Price Index. The two measures can sometimes show inflation moving in opposite directions.
- Officials at the Federal Reserve closely watch PCE inflation when setting the nation's monetary policy, especially "core" inflation, which excludes volatile prices for food and energy.
Inflation was pretty tame in February—or was it? A report scheduled for Friday on inflation could cast doubt on the notion that consumer prices are decelerating significantly.
A survey of Dow Jones Newswires’ and The Wall Street Journal’s economists revealed that the Bureau of Economic Analysis was expected to release a report on the Personal Consumption expenditures. The report is expected to show a 2.5% increase in the cost of life over the past 12 months. The forecast predicts that “core” prices, which exclude volatile food and fuel prices, will have risen by 2.7% in February compared to the 2.6% recorded in January.
If the forecasts were accurate, the PCE measure of inflation would tell a completely different story from the Consumer Price Index (another official inflation figure). This measure showed that price increases slowed down faster than expected in the month of February, boosting optimism that the post pandemic bubble high inflation is slowly but steadily deflating.
Core PCE is a particularly important measure of inflation because, unlike the CPI, the Federal Reserve uses it to determine if inflation is meeting the central bank’s 2% target. The Fed has held its key fed funds rate at an unusually high level for years—pushing up borrowing costs on all kinds of loans in an effort to slow down the economy and push down inflation.
A cooler inflation would allow for the Fed to lower interest rates, which would help borrowers who are taking out auto loans, business loans, or credit cards. Fed officials cut interest rates late last, but have not made any further cuts due to fears that President Donald Trump’s tariff-raising campaign could re-ignite inflation.
The CPI and PCE indices measure inflation in different ways, using different formulas, and giving different statistical weights for important prices, such as housing or airline tickets. The two measures often move in tandem but can sometimes diverge. This can muddy the picture regarding the trajectory of inflation.
