Will PCE Inflation Single-Handedly Delay a Rate Hike in the US?
Is a 2015 Rate Hike Imminent in the US?
PCE inflation expectations
The Federal Reserve is mandated to maintain “price stability” in the economy—one of its two goals when conducting monetary policy. It has a specific target of maintaining inflation at 2% in the longer-term.
When the Federal Reserve refers to “inflation,” it’s talking about PCE inflation. This is the price index for PCE (personal consumption expenditures). According to the central bank, this indicator is the “most consistent over the longer run with the US Federal Reserve’s statutory mandate.”
In the SEP (Summary of Economic Projections) released in June 2015. The central tendency of FOMC (Federal Open Market Committee) participants’ PCE inflation projections for 2015 didn’t change from March’s 0.60%–0.80%. The central tendency excludes the three highest and three lowest projections among the entire range.
However, the range of projections came down from 0.60%–1.50% to 0.60%–1%. As a result, participants who were comparatively optimistic about a PCE inflation reading above 1% earlier in 2015 toned down their expectations.
In June, inflation expectations for 2016 received a slight bump from the March projections. The readings imply that policymakers aren’t seeing any further fall in crude oil (USO) (OIL) prices. A further rise in crude prices will raise gasoline prices and benefit marketers and retailers like Marathon Petroleum (MPC), Valero Energy (VLO) and ExxonMobil (XOM). For 2015, projections for core-PCE inflation, which strips the volatile food and energy prices, haven’t changed between March and June.
Worries remain
Policymakers are worried about wage growth remaining subdued. A slower-than-trend rise in wages will provide even less incentive for consumers to spend. This would slow down the expected rise in PCE inflation. The rise itself is very gradual.
Recently, a fall in core PCE inflation indicated that prices of non-food and fuel items have also fallen. Policymakers attributed this to a fall in non-energy imports. They think that this is transitory. However, if this fall doesn’t turn out to be transitory, there could be another fall in inflation. This would hurt the chances of a rate hike in 2015.
Moving on from inflation, policymakers seem content with the labor market metrics. We’ll discuss this in the next part of this series.
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