Core PCE in August and Underlying Inflation

We have emphasized that the Committee’s view of the appropriate path of the funds rate going forward would importantly depend on their evolving assessment of the underlying inflation rate. The September inflation projections suggested that the Committee sees the underlying rate today as 1.8%, about what the  12-month core PCE inflation rate was from August 2016 through February 2017. That reflects a strong assumption that the slowdown beginning in March is due virtually completely to transitory factors that in effect have already dissipated—but with a lingering effect on the 12-month rate until perhaps early 2018,  when the effect of previous price level shocks will pass through the 12-month window. We are not so sure.  We take some signal from the Dallas Fed trimmed mean measure, which has shown a moderation. We will regularly update the tables below after each data release of core PCE. 

In the tables below we consider three scenarios. In Table 1, we use the actual monthly data through August and assume thereafter that monthly readings will be at a 1.8% annualized rate, the rate that would be consistent with the FOMC’s median projection for core PCE inflation of 1.5% in 2017. In Table 2, we assume that inflation after August will continue at a rate consistent with the latest reading for the Dallas trimmed mean inflation measure, perhaps a more informative measure of core inflation today. 

For reference, we also show in table 3 what we initially assumed after the March decline in the level of the core PCE, that annualized monthly readings for core PCE inflation would immediately return to our estimate of the underlying rate. 

Bottom Line 

Inflation since March has advanced at a 1.4% annualized rate, virtually the same as the 12-month rate,  1.3%. The annualized rate over the last two months has been closer to 1.2%. This compares with FOMC  participants’ median estimate of the underlying rate of 1.8% and the 12-month trimmed-mean measure at  1.6%. This does not change our expectation of a December hike but continues to indicate it is not a slam dunk. It also points to downside risk to the pace of hikes in 2018. 

Table 1. Actual Inflation Through August, then 1.8% Rate Through March 2018 

Table 2. Actual Inflation Through August, then 1.6% Rate Through March 2018 

Table 3. Counterfactual: Return to 1.8% Rate After March 2017 

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