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Financial services prices will be a technical concern, again

Published on February 13, 2024

Gerard MacDonell

I mentioned in an earlier note that I will be very curious to see how the street (implicitly) works up their estimates for the “Powell Supercore” PCE price advance for January, based on the CPI and PPI. I cannot outwit the the folks with the advanced spreadsheets there, but I would try to add some value by pointing out that it is probably more important than recognized, because services price inflation is more likely to persist than goods price deflation. See Powell, Jerome. Since I made that comment earlier this morning, the partial analysis from the diligent bean counters has calmed me down a bit, such that I figure the market has reacted at least enough to the incremental news made available this morning.

We will see what the wise guys come up with after the PPI detail tomorrow. The medical services and airline fees details there will be important because both those figures in the CPI came in on the high side within the CPI, in a way that does not map to the deflator. So, I will be mostly ears. But here is something to think about. When the street works up its estimate for the core deflator and implicity the Supercore component of that, they are not likely to net out financial services prices. If they get a strong read from the PPI there, then it will drive up their estimates of core and Supercore and they are likely to take that at face value. But I think we should really strip that out. And it is no problem to do so, assuming as I do that the street economists are using the “correct” approach, which is to model the PCE component of that with two measures from the PPI. The fit there is extremely close, as the chart below shows. And those prices within the deflator represent 2% of core services and 2.6% or core services excluding housing, which is the so-called Supercore.

What we should really do is look at the Market Price Only version of the Supercore. And I do. But I will assume that the best guess for that is simply the implied consensus on the “standard” Supercore excluding financial services prices. You may or may not agree with me on this. My adamant advice would be to give some thought to why and with how much confidence ahead of tomorrow, because there is a good chance it emerges as a technical consideration, one way or the other.

A graph showing a line graph

Description automatically generated with medium confidence — *Source: BEA, Federal Reserve Bank of St. Louis (FRED), FH simple regression*
*Data are actual to December. We will get the fitted value based on PPI detail tomorrow.*

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