Wednesday, February 8, 2023
Feb. 8, 2023

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The Week Ahead: Core inflation may have peaked, but still well-above Fed’s target


The high price of gasoline doesn’t really matter to the Federal Reserve’s fight against inflation.

That’s the stark reality as American drivers face $5 gallon gasoline and investors become convinced an economic recession is close, if not already here.

The central bank is essentially helpless in the effort to bring down energy prices. Russia’s war in Ukraine, high demand and stagnant production are immune to the Fed raising interest rates to attack inflation. That’s why, even though total inflation will continue to be painfully high, the Fed’s focus will fall on core inflation when the May Personal Consumption Expenditure data is released in the week ahead.

The PCE data is the Fed’s favored inflation barometer and the core figure ignores volatility food and energy prices. Of course, consumers can’t ignore the cost of eating and gasoline. Still, the core data offers a more refined look at pricing trends which the Fed believes better tells the story of underlying changes. The core data also is what the bankers are watching to see evidence of how their aggressive interest rate hikes are affecting the economy.

In April, core PCE had slowed slightly to 4.9%. The May statistics will be released Thursday.

No matter the number the Federal Reserve will remain solely focused on half of its dual mandate — price stability. With unemployment historically low, the bank must raise rates to tackle inflation and retain its credibility among investors and consumers.

Economist and author Andy Busch has noted the economy is undergoing dual monetary tightening to address inflation: the Fed’s interest rate hikes and the central bank reducing its balance sheet by no longer buying government and mortgage-backed bonds. It’s sobering medicine administered in fast fashion.

Core consumer inflation could fall, but it won’t avoid further interest rate increases. “We anticipate that ongoing rate increases will be appropriate,” Fed Chair Jerome Powell told the Senate Banking Committee last week. Earlier in June, after okaying the largest single rate hike in decades Powell reiterated the bank’s commitment to an inflation rate of 2%.

While May’s core PCE data may show inflation is ebbing, consumers won’t notice and the Fed’s inflation destination remains far-off.