Fed's Favorite Inflation Gauge Slows Down

The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred measure of inflation, is expected to show a slowdown in January, according to "Fed Whisperer" Nick Timiraos. The weakness in the components of the Producer Price Index (PPI) that make up the PCE index, particularly financial and medical services subcomponents, is likely to contribute to this slowdown.

If the core PCE index for January rises by 0.27% on a monthly basis, it will cause the core PCE annual rate to drop from 2.8% to 2.6%. This is well below the significant increase seen in yesterday's Consumer Price Index (CPI) index. The core PCE index is closely watched by the Fed as it excludes volatile food and energy prices.

The slowdown in the core PCE index could have implications for the Fed's monetary policy. The central bank has been focusing on bringing inflation down to its 2% target, and a lower core PCE index could indicate that the Fed's efforts are having an impact. However, it is important to note that a single month's data point should be interpreted with caution, as it may not reflect a long-term trend.

The Fed has been raising interest rates aggressively in an effort to combat inflation. The central bank has raised its benchmark interest rate by 4.5 percentage points since March 2022, bringing it to a range of 4.5% to 4.75%. The Fed has indicated that it will continue to raise rates until it is confident that inflation is on a sustained downward path.

The slowdown in the core PCE index could also have implications for the broader economy. A lower inflation rate could lead to lower borrowing costs for businesses and consumers, which could stimulate economic growth. However, it is important to note that the Fed's efforts to combat inflation have also led to a slowdown in economic growth, with the U.S. economy contracting in the fourth quarter of 2022.

In conclusion, the expected slowdown in the core PCE index in January is a significant development that could have implications for the Fed's monetary policy and the broader economy. However, it is important to interpret this data point with caution, as it may not reflect a long-term trend. The Fed will continue to monitor inflation closely and adjust its monetary policy as necessary to achieve its