August PCE Report Forecasts Show More Good News on Inflation

Economists forecast another set of good readings on inflation when the August Personal Consumption Expenditure Price Index report is released Friday.

With inflation trends heading in the right direction for the Federal Reserve, the PCE report, which is the Fed’s favored measure of price pressure, should help cement the path lower for interest rates.

Economists believe that the overall PCE Price Index will rise 0.1% on a monthly basis and 2.7% on an annual basis, according to FactSet’s consensus estimates. They expect the core measure of PCE, which excludes volatile food and energy prices, to rise 0.2% on a monthly basis and 2.7% on an annual basis.

For the annual rates of inflation, the August reports would show a slight uptick in inflation. More broadly, however, the improved readings on the PCE inflation report in recent months mirror those seen on the Consumer Price Index report.

Steven Wieting, chief economist and chief investment strategist at Citi Wealth, notes both measures have shown a deceleration in inflation. “PCE inflator is down to 2.5% year-to-year reading, and CPI is down 2.9% overall,” he says.

The Fed targets a 2% annual rate of inflation as measured by the PCE Price Index.

August PCE Report Highlights

• PCE report release date and time: Friday, Sept. 27 at 7:30 a.m. EDT.
• The PCE Price Index is forecast to rise 0.10% in August after rising 0.16% in July.
• Core PCE is forecast to rise 0.20% in August after rising 0.16% in July.
• The PCE Price Index year over year is forecast to rise to 2.7% in August after increasing 2.6% in July.
• Core PCE year over year is forecast to rise 2.7% in August after increasing 2.6% in July.

At Bank of America, economists expect a 0.15% increase in the PCE, which would translate to a 2.7% reading on an annual basis. Even if the report rounds the monthly gain up to 0.2%, “the print should add to the Fed’s confidence on disinflation,” Bank of America economists wrote.

Under the hood of the PCE report, Bank of America economists expect a softer reading on financial-services inflation. They expect a mixed set of data within medical-care inflation.

Implications of PCE vs. CPI

Both the CPI and PCE capture inflation in the economy, but there are important differences to consider when comparing them. “The gap between the CPI and the PCE index is unusually large, with housing-related inflation still showing nearly 5% year over year” in the CPI, says Wieting.

This divergence stems from the different weightings in each index. The CPI gives more weight to housing, while the PCE places greater emphasis on healthcare. This difference in focus leads to the variation between the two inflation measures.

PCE and Fed Rate Cuts

Preston Caldwell, senior US economist at Morningstar, is forecasting a roughly 0.15% increase in the overall PCE, with core inflation trending around a 1.9% annualized rate over the past three months and 2.4% over the past six months.

That, Caldwell says, should enable the Fed to follow up on its half-percentage point cut in the federal-funds rate with additional easing.

“For the next two meetings in 2024, I expect the Fed to cut rates by 25 basis points, aligning with the FOMC projections released in last week’s meeting,” says Caldwell.

While the Fed delivered a “dovish” surprise by easing more aggressively with a 50-basis-point cut, Caldwell believes they will likely maintain a measured pace of cuts, in line with the meeting’s guidance.

Unemployment could be a key factor pushing the Fed to ease further. “A continued rise in the unemployment rate would be a major driver,” Caldwell notes. “If we see unemployment ticking up, the Fed will likely take additional steps to counter it.”

More significantly, he points out that any signs of a slowing or contracting economy could prompt the deeper cuts. “If we get data showing a downturn in economic activity or GDP, combined with weakness in labor market figures, that could push the Fed toward a more aggressive 50-basis-point cut,” Caldwell explains. However, current economic data shows no clear signs of a slowdown, supporting expectations for a more gradual approach to rate reductions.

For the November Fed meeting, bond futures traders see a roughly 40% chance of a 0.25% cut and a roughly 60% chance for a 0.50% cut, according to data from the CME FedWatch tool.