Tonight's PCE May Show Rare Anomaly Unseen in Decades! Will Fed Rate Cuts Face Another Roadblock?

Gold Ten Data

After the CPI release, the market generally expects this Fed-preferred indicator to “take off.” Has a rate cut this year become a luxury? Additionally, this data was before the outbreak of the Middle East war…

At 8:30 p.m. Beijing time on Friday, the U.S. will release the January PCE Price Index. The market expects the PCE data to rise 2.9% year-over-year, unchanged from the previous value, and to increase 0.3% month-over-month, slowing from last month’s 0.4%. On the core side, the market expects the core PCE Price Index to accelerate slightly to 3.1% YoY, the largest increase since April 2024, with a month-over-month increase remaining at 0.4%.

Is the PCE destined to rise?

As the “ace” data of the U.S. Bureau of Economic Analysis, the PCE Price Index directly references CPI data across several price categories. After the latest CPI data was released, economists quickly raised their forecasts for the February core PCE Price Index, which will be announced on April 9. Several economists expect this index to increase by 0.4% for the second consecutive month, with some even prepared for a larger increase.

This divergence stems from different weighting methods for specific items in each inflation indicator. The CPI, compiled by the U.S. Bureau of Labor Statistics, places great emphasis on housing costs. A key indicator called “Rent of Primary Residence” has only increased 0.1% since January, the lowest in five years. It also assigns a higher weight to used car prices, which have fallen for three consecutive months.

On the other hand, the PCE Price Index places more emphasis on certain goods. Economists point out that products like computer software and jewelry saw significant increases in the February CPI, and they have a greater impact on PCE inflation. Analysts from Barclays, Morgan Stanley, and Bank of America forecast that the February PCE core goods prices will rise at least 0.8%, ten times the increase shown in the latest CPI report.

A shocking phenomenon

Careful analysis of CPI data that overlaps with PCE reveals that not only January but also February PCE data may not be optimistic. Moreover, all this happened before the outbreak of the U.S.-Iran war, which caused a surge in energy and fertilizer costs.

Additionally, it is worth noting a shocking phenomenon in the two main indicators measuring U.S. consumer prices: the PCE data, which is almost always more “moderate” than CPI, is now rising sharply.

Economists expect that the core PCE YoY growth in January was 3.1%, while the core CPI for the same month only increased by 2.5%, the lowest since the inflation surge in spring 2021. Data released on Wednesday for February shows that CPI growth remains at this low level.

What worries dovish policymakers is that, when inflation started to take off in 2021, the PCE indicator actually began rising before CPI. If the January core PCE is indeed as economists predict, its YoY increase surpassing that of core CPI will set a decades-long record.

The Fed’s dilemma and new variables from war

This could very well lead to a split among policymakers. The Trump administration has been touting the CPI report, claiming that price pressures are under control and that the Fed should cut rates significantly. Meanwhile, hawkish members within the Fed point to the PCE indicator to counter, saying that inflation is still well above the 2% target set by policymakers.

Citi economists explicitly state that the PCE data “should keep Fed officials cautious about inflation risks and keep them on hold for now.”

Meanwhile, before this debate is settled, the outbreak of the U.S.-Iran war adds new variables to an already complex situation. A sharp rise in oil prices will directly reflect in March’s inflation data; the jump in diesel prices will pass through to transportation costs; and disruptions in fertilizer supply in the region are expected to push up food prices.

Elizabeth Renter, senior economist at NerdWallet, said, “The longer the conflict continues, the greater the risk of pushing up overall inflation.”

Bank of America economists also pointed out that while CPI data remains moderate, PCE inflation does not provide a stronger reason for rate cuts, especially considering the upward risks from oil prices.

This puts the Fed in a real dilemma. A softening labor market should support rate cuts, but if PCE remains strong and the energy and food price shocks from the war arrive simultaneously, officials will find it difficult to justify restarting easing policies.