Will Cooler PCE Change Powell’s Mind on Rate Hike?

Many crucial US key economic indicators were released last night (30 Aug). One of them, the PCE, might be hinting at the possibility of lowering inflation.

The PCE or Personal Consumption Expenditure prices calculated from the change in price of goods and services weighted, according to total expenditure per item. It is used to measure monthly price inflation from a consumer perspective in percentage.

The second revision of U.S. 2Q23’s PCE was at the year low of 2.5%, lesser than 4.1% in previous quarter and 7.5% peak in 1Q2022. Meanwhile core PCE or PCE excluding the volatile food and energy price was at 3.7%, compared to 4.9% in the previous quarter and the 6.1% peak in 2Q2021.

If the trend continues, The US central bank should see a sign of the cooling down and might think about lowering the rate earlier than expected as the current stance is to stand the rate or might increase slightly. The CME FedWatch Tool still predicts 88.5% probability of the central bank maintaining its rates at 5.25% to 5.50% on this upcoming 20 Sep FED meeting and the earliest rate cut would be on 1 May 2024 with 35.8% probability on 5.00 to 5.25% rate.

Although, on last Friday (26 Aug), FED’s chair Powell mentioned the possibility of further rate hike and “too high inflation” which will make the next CPI publishing (13 Sep) more crucial. If the current PCE shows the true lowering of inflation, the CPI is supposed to cooldown. The easing inflation data might change Powell stance on this 20 Sep rate decision.

CPI or Consumer Price Index is a key inflation indicator used by many central banks worldwide including the US. CPI calculated from the average market price change of the basket of consumer goods and services. The latest YoY CPI is at 3.2% in July, a slightly hotter from 3% in previous month and cooler than 9% on June 2022 peak.