Jan CPI came hotter than the market expected with headline at +3.1% YoY (down from +3.4% in Dec) and core at +3.9% YoY (little changed from +3.9% in Dec) but the details were actually not that hot. For more about Jan CPI, make sure to check my CPI thread on X.
Jan PPI also came hotter than the market expected with headline at +0.9% YoY (down from +1% in Dec) and core at +2% YoY (up from +1.7% in Dec). While headline made progress, core actually bounced off of Dec level which was the lowest since Dec 2020.
Bounce off of relatively low levels for core PPI shouldn’t be much of a problem, but does the Fed see it that way? Fed’s preferred inflation gauge is neither CPI nor PPI, but PCE inflation. Lately this indicator garnered a lot of attention, especially 3 and 6-month annualized figures which were quite favorable showing inflation already running at or below 2% in Dec:
Headline PCE
3-month annualized +0.5%
6-month annualized +2.0%
Core PCE
3-month annualized +1.5%
6-month annualized +1.8%
We will get Jan PCE numbers Thursday Feb 29.
Many fear that if Jan PCE comes hotter than expected, just like CPI and PPI did, the Fed could hold rates higher for longer. Before delving into what the Fed might do with Jan PCE inflation numbers, let’s first see where Jan PCE might land at.
My Jan PCE estimates are…
… +0.3% MoM for headline, which would be the highest MoM read since Sep, and +0.4% MoM for core, which would be the highest MoM read since Jan 2023. Still, this will likely be enough for YoY figures to come down. I’m projecting headline PCE to drop from +2.6% YoY in Dec to +2.3% YoY in Jan which would be the lowest YoY read since Feb 2021, and core PCE to drop from +2.9% YoY in Dec to +2.8% YoY in Jan, which would be the lowest YoY read since Mar 2021.
My estimates would increase 3-month and 6-month annualized figures with:
Headline PCE
3-month annualized at +1.6%
6-month annualized at +2.3%
Core PCE
3-month annualized at +2.4%
6-month annualized at +2.3%
Hence, with new PCE data the Fed will likely be looking at slightly higher-than-2% three and 6-month annualized figures which looks like the inflation picture might have deteriorated from Dec, but that is all seasonality. These figures will most likely not change their rate trajectory because:
They know Jan is often affected by seasonality, and
They don’t want to make too much out of 1-month’s data.
March is off the table, as Powell said, twice. This is also something I’ve warned about in prior Marko’s Fed Reports. Still, Jan data alone will not make the Fed think about inflation being a problem again. The Fed’s rate trajectory (i.e. rate cuts) will depend on what happens with inflation figures after Jan.
If you’re interested in a detailed CPI analysis that contains:
forward looking indicators,
detailed CPI forecast for Feb and
core and headline CPI trajectory in 2024,
consider subscribing to Marko’s CPI Report which is part of premium Arkomina Research.
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I love all of your forecasts. Spot on!