Prices for longer-lasting durable goods such as appliances, computers and vehicles decreased 0.4%. Headline inflation there fell to 2.4% on a 12-month basis, though core, which excludes food, energy and tobacco, was still at 3.6%, though down from 4.2% in September. Like the Fed, the European Central Bank targets 2% as a healthy inflation level. The fed funds rate, the central bank’s benchmark level for short-term lending, is targeted in a range between 5.25%-5.5%, its highest in more than 22 years. Nowcasts can provide an early signal on inflation trends almost in real time.

  1. Several Fed officials, though, have pushed back against such assumptions.
  2. You’re unlikely to see returns high enough to fend off inflation when you hold your money as cash in a bank account.
  3. There are a few more, mostly minor differences, related to items such as how seasonal adjustments are handled.
  4. On a macro scale, we also saw the U.S. economy’s GDP growth revised upwards.

Last month the Fed paused on rate hikes for the first time in nearly a year to let the economy ‘do its thing’ (our words, not the Fed’s). New jobs data last week revealed new claims for unemployment benefits fell by the biggest drop in 20 months, with 239,000 claims filed – a 26,000 drop from the week before. Analysts had previously said unemployment claims needed to be at around 280,000 to indicate a significant decline in job growth. All of this leaves a lot for the Fed to think about, with the stock market wavering on Monday morning as jobs data later this week could all but confirm a rate increase for July. Despite the consistent pace of inflation increases, most Fed officials remain reluctant to change policy. In other economic news, the Chicago manufacturing reading came in at a higher than expected 75.2, its highest level since November 1973.

What is the current Fed interest rate?

As inflation drifted closer to the Fed’s target, consumer spending increased 0.7%, stronger than the 0.5% estimate. Personal income growth edged lower to 0.3%, in line with the forecast. “We remain skeptical that inflation is on track to return to (the Fed’s) 2% target without a significant easing of labor market conditions,” Barclays wrote in a research note.

PCE inflation report: Key measure ticks higher in July. What will the Fed do?

The Fed depends on the nuances that the PCEPI reveals because even minimal inflation can be considered an indicator of a growing economy. The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term.

The market reaction

Friday’s government report showed that prices rose just 0.2% from November to December, a pace broadly consistent with pre-pandemic levels and barely above the Fed’s 2% annual target. Compared with a year ago, prices increased 2.6%, the same as in the previous month. The CPI is compiled monthly by the Bureau of Labor Statistics based on a survey of urban households.

Consumer vs. Producer Costs

Utilizing AI, it diligently examines weekly data to forecast which assets like TIPS, precious metals, and commodities could shield against inflation and yield returns. The AI then dynamically weights the Kit’s holdings to help you stay one step ahead. Disposable personal income, after taxes and other withholdings, tumbled 14.6%.

Both the PCE Price Index and the Core PCE Price Index (which, again, excludes prices for food and energy) show how much prices change from one period to another. Breakdowns of the PCEPI show price inflation/deflation by category as well. The continued disinflation coinciding with robust economic growth complicates the path forward for monetary policy. With growth so robust, cutting rates too quickly or too aggressively poses a significant risk of reigniting inflation.

Because this isn’t based on real consumer supply and demand, it doesn’t necessarily reflect inflation in the real economy. That’s why economists often turn to core measures of inflation instead, which rise much more stably. Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy. When you measure these price changes across an entire economy, that’s the rate of inflation.

When people spend without hesitation, it usually means that the economy is doing well. When they cut back on spending, it points to problems in the overall economic picture. PCE also includes spending on behalf of households by third parties, such as employer-paid health insurance and medical care financed through government programs, life insurance expenses, and pension plan expenses. Other measures of inflation tracked by economists include the Producer Price Index (PPI) and the Gross Domestic Product Price Index.

But they have held borrowing costs steady at that level since July — forgoing a final rate increase that they had previously predicted — and have signaled that they could cut interest rates several times this year. Inflation is the tendency for prices of goods and services to rise over time. Too much inflation suggests that an economy is facing serious troubles—but negative inflation, otherwise known as deflation, is an even bigger problem. Achieving inflation that’s not too hot, not too cold, but just right is needed to drive spending among businesses and consumers, and thereby create a baseline of economic growth.

This measure is also often used by companies to maintain their employees’ purchasing power each year. Core PCE inflation plays an important role in the U.S. financial system because the Federal Reserve references it to gauge U.S. inflation when setting monetary policy. New home sales data also unveiled new U.S. single-family home sales surged to their highest levels in nearly 18 months as a dearth of existing home inventory created pent-up demand. New home sales climbed 12.2% to 763,000 units sold last month, much higher than the 675,000 predicted.

The PCE inflation rate is calculated by adding up the dollar amounts of all goods and services in a basket of goods and services, comparing the total to the prior month’s figures. Some prices must be adjusted based on estimates because the data needed for calculation is only compiled trading fractals quarterly, whereas PCE inflation is released monthly. The above table illustrates two commonly discussed important differences between the PCE deflator and CPI-U. The first is the relative importance of housing, which is due in part to the difference in scope mentioned above.

During 2023, inflation fell steadily as global supply chains recovered from pandemic-era disruptions and more Americans came off the sidelines to take jobs, which helped slow wage growth. Slower-rising pay eases the pressure on businesses to raise prices to offset higher labor costs. According to the Fed’s preferred measure, inflation peaked at 7.1% in June 2022.