Gauging the Fed’s Progress on Inflation

Inflation, and its impact on future Federal Reserve (Fed) policy, has been a persistent theme in markets in recent months. The latest chapter of the story unfolded this morning, with the release of personal consumption expenditure (PCE) inflation data for February. Chief Investment Strategist John Lynch explains, “Today’s core PCE reading, at 1.6%, was in line with expectations but remains below the Fed’s 2% target. Looking beyond the headlines, this reading isn’t likely to have an impact on Fed policy, and we continue to expect a total of three rate hikes in 2018.”

There are three widely used measures of inflation, and each one contains a basket of goods that measures price pressures differently.

  1. The PCE Price Index hinges on what businesses sell.
  2. The Consumer Price Index (CPI) is developed by a survey of what consumers buy.
  3. The Producer Price Index (PPI) measures inflation in selling prices received by goods and services providers.

Year-over-year growth in the headline figures for core CPI and PCE are lower than they were a year ago; however, core readings (which exclude food and energy prices) for all three measures have moved higher over the past six months, which suggests the Fed has made at least some recent progress in its efforts to spur a pickup in inflation. Continued job growth in an already tight labor market, combined with the recent addition of fiscal stimulus in the form of tax cuts, may help this trend continue in the near term. However, inflation is so far showing few signs that it will increase enough to warrant a significantly more aggressive Fed in the near term.



Personal consumption expenditures (PCE) is a measure of price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, nondurables, and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Producer Price Index (PPI) is an inflationary indicator published by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy.

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