12.30 am, March 2 AEDT will see the next release of the Core PCE Index.

This is the inflation measure preferred by the US Fed and, after last night’s release of CPI data, some analysts are tipping that it could hit the Fed’s 2% target.

That’s why the market has changed its outlook for the next Fed rate hike. Futures are now implying a 44% probability that it will come at the March meeting. The probability of a hike occurring by June has increased to 78%, including a 28% probability that the Fed will lift rates twice by then

Inflation background

There have been quite a few false starts with US inflation over the past couple of years when it looked as though it was going to approach the Fed target but has backed off.

The basic situation is that rental and other services costs have been growing but overall inflation has been consistently held down by the price of goods. Weak global demand and the strong US Dollar have kept a lid on the price of manufactured goods.

This showed signs of changing in January. Goods inflation rose 0.4% for the month.   Improved commodity prices and a return to Producer Price Inflation in China may be starting to feed through to the price of goods. After stripping out the volatile food and energy components, the overall CPI measure of inflation rose 2.3% for the year. 

Core PCE

 

 

The Fed looks at lot of different inflation measures to form a holistic view of price changes in the economy. No single measure is perfect. However, the Core PCE measure is the one it gives the greatest weighting to.

The PCE index is derived from the data on Personal Consumption Expenditure (PCE) throughout the economy. It’s a wide measure of prices on the things people spend money on. The core measure strips out some a lot of volatile items like meat; vegetables;fruit and energy. These are all subject to the weather and seasonal influences.

Core PCE rose 1.7% in the year to January. If it does hit 2% and looks like staying there, the Fed will have met its inflation objective and be closing in on its employment objective. The market had been expecting that the Fed would, yet again, move more slowly than the individual governors’ dot points suggest If its inflation target is hit, this seems unlikely. That would imply at least 3 rate hikes this year, with the first no later than June.

March 2nd and the Core PCE could be important. It could produce volatility in either direction and have a significant impact on currencies, stocks and bonds. For traders, much will depend on where markets are placed leading into the figure.

Even if the March figure doesn’t change things, Core PCE will be a key figure to watch for the next few months