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Core PCE deflator, including the core of it

Published on February 16, 2024

Gerard MacDonell

Consensus estimates of the January gain of the core PCE deflator are hovering around 45 bps. About 7 bps of this is likely to be the consensus estimate of the financial services noise. (I had previously said 11 but that was for the supercore.) I don’t think that noise is irrelevant. When people figure out that there is an add there and become skeptical of it, they are likely to look at the MPO data, which I think they should have been doing all along. So, the best guess is that the Market Price Only (MPO) core will be up 38 basis points, which would allow my chart to update as follows, ignoring the revisions revisions which will be small. Keep in mind that the MPO core includes the lagging government rent data. The observed rent version of this is lower. So, it is not like we now have a capital letters inflation PROBLEM.

How big a surprise is this? Well the old consensus for the core was about 30 bps and that probably incorporated half the noise from financial services that has actually arisen. So it looks like the ex-noise figure comes up about 10 or 11 bps this AM.

A graph with a line

Description automatically generated — *Source: BEA, FH estimate*
*Data are actual to December and estimated for January.*

I noticed one of the street economists estimating that what we call the MPO Powell Supercore will be up 60 bps. That’s what my initial wild guess was after the CPI! But I got talked down to 40 bps by people who know the numbers better. So the news this AM is to raise that obviously. About half that news is from those noisy financial services prices. So the MPO version of the Powell Supercore is looking like a rise of about just under bps. This is preliminary, but should be reasonably close to how the informed consensus will see things just ahead of the release of the actual data at the end of the month. The 2 Stage Disinflation Hypothesis is not totally dead yet! And while there is news to come, at this point I would think June is more likely than May for the first cut. And people who are wondering why we are even talking about cuts ought not be entirely dismissed, although the base case is obviously that they do cut meaningfully over next two years.

A graph with a line graph

Description automatically generated — *Source: BEA, FH estimate*
*Data are actual to December and estimated for January.*

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