Investors are likely to get more clarity on the future direction of interest rates next Friday (Sept. 29) when the latest reading from the Personal Consumption Expenditures (PCE) Price Index is released. Markets are also once again on edge as concerns about a potential stock market crash swirl.
The PCE index is the U.S. Federal Reserve’s preferred measure of inflation and can be expected to influence the central bank’s views on where interest rates should go from here. Markets will be watching the latest PCE reading closely, especially following the recent comments by Fed Chair Jerome Powell that rates are likely to rise further and remain higher for longer in order to combat stubbornly high inflation.
The PCE Index Explained
The PCE is similar to other inflation gauges, such as the Consumer Price Index (CPI). Both are issued by the Bureau of Labor Statistics and measure the price increases and decreases of goods and services purchased by consumers in the U.S. However, where the PCE index differs is that it includes more comprehensive coverage of goods and services, and it adjusts as consumers substitute some goods and services for others.
The bottom line is that the Fed feels that the PCE index is a more accurate gauge of current inflation within the U.S. The central bank has been relying on the PCE, which is issued by the Bureau of Economic Analysis, to influence its interest rate decisions since 2000.
The Fed also continues to factor in CPI data but gives particular weighting to the data in the PCE index. The next reading from the PCE on Sept. 29 is likely to determine if the Fed further raises interest rates following the conclusion of its next policy meeting on Nov. 1.
The Latest Reading
The PCE index’s latest reading, which was for July of this year, showed that consumer prices rose 0.2% on a monthly basis and 3.3% annually. When volatile food and energy prices were stripped out, the core PCE index showed inflation increased 0.2% from June and was up 4.2% from July 2022. While those numbers were in line with forecasts, they show that inflation in the U.S. remains well above the Fed’s 2% annualized target.
A positive sign is that the PCE index shows inflation rising at a slower pace than the CPI, which is the other primary measure of inflation. For July, the CPI showed core inflation advancing 4.7% year-over-year. The August reading of CPI showed core inflation up 4.3% from a year earlier. CPI data tracks a month ahead of the PCE.
If the PCE index’s August reading comes in below expectations, it could fuel hopes that the Fed will hold off on any further rate hikes. A hotter than expected reading, and expectations that interest rates rise by year’s end will grow.
Stock Market Crash: Stocks on Edge
While stocks today appear to be paring the losses of the last few days and are once again in the green, markets remain on edge. Anxiety levels can be expected to remain high in the lead-up to next Friday’s PCE reading for August. Stocks peaked at the end of July. Since then, the benchmark S&P 500 index has declined 5%.
Further volatility should be expected in the coming days as all eyes turn to the Fed’s preferred inflation measure.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
