US January PCE to be Released Tonight! Core Inflation Expected to Surge to 3.1%, Will It Shake Up Rate Cut Timeline?

U.S. January PCE Price Index to be Released Tonight (28th)

The U.S. will release the January Personal Consumption Expenditures (PCE) Price Index tonight at 8:30 PM Taiwan time. Market expectations are for the core PCE to increase by 3.1% year-over-year, the largest rise since April 2024, significantly exceeding the Federal Reserve’s 2% inflation target. More concerning is that the historically “moderate” relationship between PCE and CPI is now facing potential breakdown.

(Background: U.S. January CPI fell to 2.4%, indicating further easing of inflation; the probability of a rate cut by the Fed in June has risen to 51%)

(Additional context: Bloomberg reports that the impact of the U.S.-Iran conflict on Bitcoin has been limited, with prices consolidating between $60,000 and $70,000)

The U.S. will announce the January PCE Price Index tonight at 8:30 PM Taiwan time. The market broadly expects the overall PCE to rise 2.9% annually, unchanged from the previous period, with a monthly increase of 0.3%, slightly slower than last month’s 0.4%.

For core PCE, estimates suggest a slight acceleration to 3.1% year-over-year, marking the largest increase since April 2024 and significantly surpassing the Fed’s 2% inflation goal.

The Difference in Weightings Between CPI and PCE Is the Root of the Discrepancy

Why do CPI and PCE, both measures of inflation, show such divergent trends? The key lies in their differing weighting methods for various items.

The CPI, compiled by the U.S. Bureau of Labor Statistics, assigns a very high weight to housing costs. The “Rent of Primary Residence” index rose only 0.1% in January, the lowest in five years. Additionally, CPI places a relatively high weight on used car prices, which have been falling for three consecutive months. These factors together have pulled down the overall CPI reading.

In contrast, the PCE Price Index, compiled by the Bureau of Economic Analysis (BEA), emphasizes the costs of specific goods. Analysts from Barclays, Morgan Stanley, and Bank of America note that in February, items like software and jewelry saw significant price increases in CPI, but these items have a much larger impact on PCE inflation. All three forecast that February’s core PCE for goods will rise at least 0.8%, roughly ten times the increase indicated by CPI data for the same period.

The “Moderate” PCE Pattern Is Now Shaking

Among the two main indicators of U.S. inflation, PCE has traditionally played the role of a “relatively moderate” gauge, usually showing lower figures than CPI, making it the preferred benchmark for the Federal Reserve’s monetary policy decisions. However, this tradition is now facing unprecedented challenges.

Economists who have analyzed CPI components corresponding to PCE have found that not only is the January PCE figure concerning, but February’s outlook may also be grim. Some analysts expect February’s core PCE to increase for the second consecutive month by 0.4%, with some even considering larger increases.

Adding to the complexity, these deteriorations occurred before the outbreak of the U.S.-Iran conflict. As the conflict continues, prices for commodities like energy and fertilizers have surged, and the full impact on inflation has not yet been reflected in current data.

Bitcoin initially dipped from pre-airstrike levels to around $63,000 during the early stages of the U.S.-Iran tensions, then rebounded to approximately $70,100. The market remains highly sensitive to macroeconomic uncertainties.

• Overall PCE (January estimate): 2.9% YoY (unchanged), 0.3% MoM
• Core PCE (January estimate): 3.1% YoY, 0.4% MoM, the largest annual increase since April 2024
• February Core PCE Outlook: Barclays, Morgan Stanley, and BofA estimate at least 0.8% monthly increase in core goods

For the Federal Reserve, persistently high core PCE suggests that the conditions for a rate cut in June are diminishing. Although the market initially priced in a 51% chance of a rate cut in June following the January CPI release, if tonight’s PCE data comes in as expected with strong figures, the Fed will have even more reason to keep rates steady, and market expectations for rate cuts may need to be re-evaluated.