Recently, several senior officials, including Federal Reserve Chair Jerome Powell, have increasingly mentioned a relatively obscure inflation indicator—the "Market-Based Personal Consumption Expenditures (PCE) Price Index." This index excludes certain service sector data that require estimation, bringing it closer to the Fed's 2% inflation target, and is considered an important reference for future policy adjustments by the Fed.
Market-Based Inflation Indicator: Closer to Actual Consumer Prices
The "Market-Based PCE Price Index" eliminates some prices that government statisticians can't directly observe and must estimate. For example:
- Portfolio Management and Investment Advice: These items, related to stock market fluctuations, are excluded to prevent the indirect inflationary effect of stock market rises.
- Insurance Costs: This includes categories like motor vehicle insurance, where the inflation component related to the lagging effect of car prices significantly increased year-over-year in 2024, but is not included in the market-based inflation calculation.
Compared to the traditional PCE, this index remained at about 2.4% in November 2024, while the Fed's preferred PCE inflation measure accelerated to 2.8% over the same period. This makes the market-based index appear more moderate and closer to actual consumer price changes.
Officials' Viewpoints: Focus on Indicator Alternativeness and Possible Policy Adjustments
Fed Governor Waller recently elaborated on the significance of this indicator in his speech. He argued that estimated price data (such as housing services and non-market services) are less instructive for economic supply-demand balance, emphasizing the importance of focusing on real market transaction inflation levels. He supports further Fed rate cuts this year and pointed out that the current inflation data may be overstated due to some inefficient estimates.
Powell mentioned in a previous press conference that "non-market services" are an important factor in recent inflation rises. Board member Adriana Kugler also expressed similar views in an interview at the beginning of January. The December meeting minutes showed that several policymakers agreed with Waller, believing that the conditions for rate cuts might be more lenient than the market expects.
Market Reaction: Divergence in Rate Cut Expectations
As the Fed focuses on alternative inflation indicators, the market's judgment on its timing for rate cuts has become more complicated. This week, strong ISM services PMI and JOLTS job vacancy data significantly dampened investors' expectations of a rate cut before July, leading to a sustained increase in treasury yields.
Long-Term Outlook and Leadership Changes
Analysts noted that the market-based inflation indicator might offer the Fed new policy flexibility, but its long-term effectiveness still needs observation. Meanwhile, Trump's advisory team is considering reshaping the Fed's leadership and is screening candidates for Powell's successor after his term ends in 2026, potentially affecting future Fed policy directions significantly.
