Don’t Be Fooled by Conflicting Inflation Metrics. The Fed Won’t.

Rarely have market prognosticators disagreed by such a broad margin on the path forward for inflation and the Federal Reserve’s efforts to fight it. That’s in part because the government’s two main price gauges leave a lot of open ground for the interpretation of the facts.

The underlying signal from the personal consumption expenditures price index — the so-called trimmed-mean version — suggests that it has been converging on more normal levels; the consumer price index, on the other hand, remains unusually high. It’s a mistake to focus entirely on one indicator over the other, and the Fed isn’t likely to stop raising interest rates until it sees strong evidence that both are clearly coming down.

Consider the PCE, the preferred metric of market doves. The Fed decided to focus on PCE in 2000 after a period of extensive analysis, noting in a February 2000 report to Congress that it is both “more comprehensive” and a “more consistent series over time.” Its weights can also change as people’s consumption preferences shift, allowing for substitution effects if families decide, for instance, to favor chicken over beef.

But members of the Federal Open Market Committee frequently talk about CPI, whose reading for May is scheduled to be released on Friday. As Harvard University economist Judd Cramer pointed out to me, CPI directly influences tens of millions of workers and retirees. According to Bureau of Labor Statistics figures, it’s tied to wages for more than 2 million workers under collective-bargaining agreements. It’s also linked to the incomes of about 48 million Social Security beneficiaries, 4.1 million military and civil service retirees and their families and some 22 million recipients of food assistance.