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Slicing and dicing the consensus for the PCE deflator in January

Published on February 19, 2024

Gerard MacDonell

I mentioned on the call Friday that the inflation data for January had done one and a half round trips. The CPI data were initially quite unnerving. Then the bean counters informed us that the relatively strong readings within the CPI were relatively lowly weighted within the PCE deflator, which was therefore tracking at a tamer pace. And then the PPI data came in above expectations, and not just in ways that influenced the noisier components of the core PCE deflator. The underlying measures are also tracking on the firm side. Estimates of both the MPO version of the core PCE deflator and the MPO version of the so-called supercore came up about 8 to 10 bps after the PPI itself.

I present below a table of the various measures of PCE inflation for January that I infer from the consensus estimates of the core PCE deflator, my own readings of what some of the core elements there must be, and then some backing out of the remaining bits. This should be close. But what it is close to is the implied consensus for the January reading, as opposed to what the January reading will actually be. Even the careful bean counters are occasionally off a bit.

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Source: Federal Reserve Bank of St. Louis (FRED) for PPI inputs, BEA for the deflator shown, FH regression

Data are actual to December and fitted to January.

For those who have been following my commentary here, the table should be fairly self-explanatory. There is just one point of explanation required. I figure that the consensus must be factoring in a 4.5% rise of the PCE Services Deflator for Portfolio Management and Investment Advice. The reason is that this can be very neatly fit to two series within the PPI, as the chart above shows. Apparently, there was a minor timing issue a few months back. I have not investigated what caused that. But for this month, the 0.15% of the core PCE deflator that can be described as obvious noise is expected up 4.5%. Furthermore, I assume that there are no further sources of noise separating estimates of the core PCE deflator from the implied estimate of the Market Price Only (MPO) component of it. That assumption is not valid for all periods, but it should be close this month.

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Source: Consensus estimates and FH calculations/inferences

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