On the 29th, US January PCE Inflation Data Release... Wall Street Tense Over Expected Monthly Increase Expansion

Core PCE Inflation Expected to Rise 0.4% MoM
Up from 0.2% in December Last Year

Market attention is focused on the U.S. January Personal Consumption Expenditures (PCE) price index, which will be released on the 29th. On Wall Street, there are expectations that the PCE price index could rise more sharply than anticipated, following the trend of the January Consumer Price Index (CPI), which had been an obstacle to interest rate cuts.

[Image source= Xinhua News Agency]

According to Bloomberg on the 25th (local time), the core PCE price index, excluding energy and food, is expected to increase by 0.4% month-over-month in January. In December last year, it rose by 0.2%, but the increase is forecasted to more than double. If the forecast is met, it would represent the largest monthly increase in 11 months since February last year (0.4%).

With the monthly increase in the core PCE price index in January, the 3-month and 6-month annualized growth rates are also expected to exceed the Federal Reserve's (Fed) target of 2%, reaching 2.6% and 2.4%, respectively. In December last year, the core PCE price index rose 0.2% month-over-month, causing the previous 3-month and 6-month growth rates to fall below the Fed's target at 1.5% and 1.9%, respectively.

Anna Wong, an economist at Bloomberg Economics (BE), Bloomberg's economic research institute, stated, "The hot January CPI and Producer Price Index (PPI) have foreshadowed the rise in PCE prices."

The previously released CPI and PPI exceeded market expectations. January's CPI rose 0.3% month-over-month and 3.1% year-over-year, surpassing forecasts of 0.2% and 2.9%. The PPI for the same month also increased by 0.3% month-over-month and 0.9% year-over-year, exceeding expectations of 0.1% and 0.6%.

In particular, the PCE price index is the indicator the Fed pays the most attention to, making its market impact greater than that of the CPI. Ellen Zentner, Morgan Stanley's U.S. economist, analyzed that if the monthly increase in the PCE price index expands, "a challenging inflation environment will be created over the coming months."

The release of the January PCE price index may further reduce the already diminished expectations for an early interest rate cut. Fed officials have repeatedly stated that additional evidence of inflation slowing is necessary as a prerequisite for rate cuts. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflects over a 90% probability that the Fed will keep rates unchanged at the May Federal Open Market Committee (FOMC) meeting, a sharp rise from the 9% level a month ago. The probability of a rate cut of 0.25 percentage points or more at the June FOMC is currently priced above 68%.

However, the core PCE price index for January is expected to rise 2.4% year-over-year, a slowdown compared to December last year (2.6%).

This week, in addition to the PCE price index, the revised U.S. fourth-quarter Gross Domestic Product (GDP) will be released on the 28th. Wall Street expects it to remain at the same level as the preliminary figure released last month, showing 3.3% growth quarter-over-quarter.