August PCE Data: The Details That Matter

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, is due out on Friday. While the increase is not expected to be alarmingly high, investors are keen on scrutinizing the fine print for warning signs. Market forecasts predict a 0.3% increase in the headline PCE and a more modest 0.2% rise in the core PCE, which excludes volatile food and energy costs, making it a more reliable indicator of future inflation trends.

Powell's Comments and Inflation Expectations

Federal Reserve Chair Jerome Powell has already shared some key expectations for the PCE report at a public event, stating that Fed economists anticipate the headline PCE to reach 2.7% year-over-year through August, up from 2.6% the previous month. The core PCE is expected to remain steady at 2.9%, in line with Wall Street forecasts.

Inflation vs. Labor Market: The Fed's Balancing Act

While inflation remains above the Fed’s 2% target, Powell and other Fed officials have been comforted that U.S. tariffs have not significantly driven up inflation. This has delayed interest rate cuts until the impact of tariffs could be fully assessed. Meanwhile, the labor market is showing increasing signs of strain, with a sharp decline in jobs added, a slight increase in the unemployment rate, and a longer time for individuals to find work. The Fed cited a “weakening labor market” as a justification for their recent interest rate cut.

Monitoring Inflation Details: Goods vs. Services

Although the focus has temporarily shifted to the labor market, Fed officials are closely monitoring inflation dynamics, particularly focusing on two key paths: 1. **Goods Prices:** How much further goods prices, which are most impacted by tariffs, will continue to rise. 2. **Services Costs:** Whether the recent rebound in services costs represents just a short-term fluctuation. Goods prices have seen an increase since the beginning of the year but have remained relatively low historically. In contrast, services prices had been moderating inflation but rebounded in June and July, raising some concerns.

Expectations for Services Costs

The majority of Fed officials expect services costs to stabilize again and will be looking for evidence of this in the August PCE report. As Rick Gardner, Chief Investment Officer at RGA Investment Solutions, stated, “Friday’s PCE data is the next key economic indicator to watch closely.”

The Nuances of Services Inflation

While goods inflation is often tied directly to tangible input costs and tariffs, services inflation can be driven by more complex factors like wage growth, productivity, and overall demand. Understanding the components contributing to the recent uptick in services inflation is crucial for the Fed to determine its appropriate policy response. Furthermore, shifts in consumer spending patterns can also impact services inflation. If consumers shift their spending from goods to services, increased demand could put upward pressure on service prices. This is an area economists will be closely watching as the economy continues to evolve. Finally, the impact of globalization on service sector pricing is a growing area of interest. While the trade of physical goods has long been a subject of global economic analysis, the trade of services is becoming increasingly relevant. The extent to which global competition moderates or exacerbates domestic service inflation is a factor the Fed is likely considering.