US inflation data is due on Friday, 26 January 2024 at 8.30 am US Eastern time:
Goldman Sachs preview:
- forecast for core PCE inflation in December is 0.18%, translating to a six-month annualized rate of 1.88% and a YoY rate of 2.94%.
- This reflects the Fed's primary measure of inflation.
- Headline PCE prices are also projected to increase by 0.18% in December, corresponding to an annual rate of 2.63%.
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The Federal Reserve prefers the Core Personal Consumption Expenditures (PCE) Price Index over the Consumer Price Index (CPI) as a measure of inflation for several key reasons:
- The Core PCE covers a broader range of goods and services than the CPI. While CPI focuses on out-of-pocket expenses for urban consumers, PCE includes expenditures on behalf of households, such as employer-paid health insurance and Medicare. This wider scope makes PCE a more comprehensive measure of consumer spending.
- PCE adjusts for the substitution effect, where consumers might switch from higher-priced goods to lower-priced alternatives as prices change. CPI, on the other hand, uses a fixed basket of goods and services, which can overstate inflation if consumers shift their consumption patterns in response to price changes.
- PCE specifically measures spending by individuals and can more accurately reflect the consumption patterns that are central to the U.S. economy.
- The 'core' version of both indices (Core PCE and Core CPI) excludes food and energy prices, which are volatile. However, the Fed often gives more weight to Core PCE because of its broader coverage and substitution bias adjustment.
- PCE data are subject to regular and comprehensive revisions that reflect the latest and most accurate information available. This can make PCE a more reliable measure over the long term.
- Core PCE is a more stable and accurate reflection of the long-term inflation trends that guide monetary policy.
