Based on what I have seen so far, it looks like the informed consensus for the Market Price Only (MPO) version of the Core PCE Price Index might be a gain of 23 bps (false precision) during May.
The advantage of looking at the MPO version is that it strips out the high-frequency noise from inferred prices for which there are no direct market signals. Recently, by far the largest culprit there has been the price index for Portfolio Management and Advisory fees. At short horizons, it tells you mostly what the stock market has done, which means it is quite misleading. This is the case for two reasons. First, stock market gains are not really inflation. Second, and perhaps more to the point, we know roughly the scale of how the government data will treat this well ahead of time. What we don’t know is only the precise timing. And the precise timing is irrelevant, even if we do accept that stock market gains are inflation, which I don’t.
Still, when we strip out non-market prices we eliminate a bunch of noise but at the expense of a slight structural downward bias, because non-market prices tend to rise in relative terms over time. So, think of a 23 basis points MPO mapping to an ex-noise 25 bps in the Core PCE. Or to put it more simply, think of this as 25 bps on the standard Core with no hair on it, at least from non-market prices. That works out to 3% (ar) on the month. That is baddish, and perhaps a bit more so than was expected before the CPI.
But there is one mitigating factor that keeps it from being alarming. Some of the beat here has to do with those lagging government measures of rents. Within the CPI rents are just far overweighted, which is an important issue. But I am talking about an issue separate from that, which is relevant even when we get the weights right, as in the Core PCE. The gap between the advance in May and my proxy of the trend in marginal rents probably lifted the Core PCE by about 30 bps expressed at an annualized rate. So, maybe we can shave that 3% back to the single best measure running at 2.7% (ar) during May sequentially. Another baddish month, but probably not something to force the Fed to go in, say, July.
To repeat, I will have more after the PPI when the estimates for the Core PCE solidify a bit further. But I wanted to give this bit of interpretation ahead of time, because the folks who do the expert bean counting work tend, understandably, to leave some point of interpretation on the table. If you are working on getting the basic facts right, probably best to focus on just that. Which leaves something for the rest of us to do.
