Fed Gains Confidence from Uncommon Inflation Measure Insights
Federal Reserve officials are finding new confidence in a lesser-known inflation gauge, suggesting a more stable economic outlook ahead
Inflation, Federal Reserve, Jerome Powell, Market-Based Measure, Treasury Yields, US Economy
Washington: So, the Fed is getting a bit more optimistic about inflation, thanks to this lesser-known price gauge. You know, the one they call “market-based” inflation. It’s been a hot topic among the bigwigs, including Chair Jerome Powell.
This gauge skips over a bunch of services where they can’t really pin down the prices directly. Instead, they have to estimate them. Because of that, it paints a different picture of inflation lately. While the Fed’s usual measure jumped to 2.8% in November, this market-based one has been pretty steady at 2.4% since May.
Now, this is important, especially with Treasury yields going up. Investors are getting a bit skeptical about the Fed cutting interest rates in 2025. The central bank has made it clear they want to see more progress toward their 2% target before they think about lowering borrowing costs again. But mentioning this alternative gauge might mean they’re open to easing up sooner.
Fed Governor Christopher Waller, who thinks inflation will keep cooling, talked about why this market-based measure matters in a speech. He’s all for considering rate cuts this year.
Waller pointed out that inflation in 2024 is mostly driven by these estimated prices, like housing services, which aren’t the best indicators of supply and demand across the board. He’s not alone; many policymakers seem to agree with him.
This market-based version of the personal consumption expenditures price index leaves out a bunch of items that the government has to estimate. Some of the big ones are things like portfolio management and investment advice, which tend to follow stock prices. So, the recent stock market rally has pushed inflation up a bit.
Powell also mentioned these “non-market services” as a reason for the recent inflation rise in a press conference. It’s a common theme among the Fed folks lately.
Experts like Anna Wong from Bloomberg Economics say that ignoring these imputed prices makes sense because they don’t really help predict where inflation is headed. For instance, transportation insurance costs shot up 6.5% over the past year, partly due to a bounce-back from car price hikes in 2021 and 2022.
Wong adds that while this inflation feels real to people, the Fed is likely to look past it. The Bureau of Economic Analysis is set to release the PCE inflation data for December on January 31, so we’ll see what that reveals.
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