Inflation prints can be noisy—headline cools, core sticks, revisions bite, and markets swing. This guide explains why the FOMC leans on Core PCE, how PCE differs from CPI, and how to read each release with a simple, repeatable process. Start with the 30‑sec checklist, then apply the 3/6‑month annualized lens and the “consensus vs actual” framework to map prints → policy → assets.
30‑sec Checklist
- Scope: PCE (BEA, broader, substitution) vs CPI (BLS, fixed basket)
- Focus: Core PCE (ex food/energy) for persistence; FOMC’s 2% goal is PCE‑based
- Read: headline/core m/m, y/y, and 3/6‑month annualized
- Check: consensus vs actual, revisions, supercore/services details
- Map: trend → dots/SEP → cadence of cuts → curve • USD • equities
Two–three consecutive cool core prints with benign revisions and labor cooling build credibility for easing; one‑offs do not.
What PCE Is — and Why It Matters
PCE (Personal Consumption Expenditures) is compiled by the BEA using business‑side data and allows for substitution when consumers switch to cheaper alternatives. CPI is a household price index (BLS) with a more fixed basket, often more volatile. The FOMC’s 2% target is framed in PCE terms; for underlying inflation, the Committee emphasizes Core PCE.
- Why PCE over CPI? Broader scope, dynamic weights, healthcare imputations, and better linkage to actual spending behavior.
- Why Core? To track persistence—policy reacts to durable moves, not noise from food/energy.
A Brief Background & History
PCE emerged as a broader consumption price gauge (BEA) complementing CPI (BLS). As the FOMC refined its communication framework, PCE—especially Core PCE—became central for assessing progress toward 2% on a sustained basis. Over time, markets learned that persistent changes in core PCE trend—rather than a single monthly print—anchor policy expectations.
How to Read Each Print (Step‑by‑Step)
- Step 1 — Headline/Core: Note m/m and y/y. Direction vs prior matters, but don’t stop here.
- Step 2 — Trend: Recompute 3/6‑month annualized for Core PCE. This lens captures momentum toward 2% better than y/y in a late cycle.
- Step 3 — Surprise: Compare to consensus. Log the surprise (bps) for headline and core; surprises drive the first move.
- Step 4 — Revisions: Scan revisions. A benign m/m can be offset by a hot revision to the prior month; trend rules.
- Step 5 — Composition: Look at services, supercore (ex shelter), and sticky categories; persistence often hides there.
Write three numbers on a sticky: core m/m, core 3/6‑month annualized, net revision. If 2 of 3 favor cooling, treat it as “policy‑friendly.”
Policy Lens — How the FOMC Uses PCE
The reaction function is simple: if Core PCE’s 3/6‑month trend cools alongside labor easing and anchored expectations, the case for easing improves. If the trend stalls or reverses, the cadence slows.
- Later/Faster: credible disinflation → later start, faster follow‑through
- Sooner/Slower: sticky/re‑accelerating core → earlier hints, slower cadence
- Dots/SEP: prints bend the dots; sustained trend changes precede material SEP moves
Key principle: The FOMC needs evidence of durability. One cool month is not enough; sequences and revisions matter.
Market Playbook — From Prints to Assets
- Rates: cooling trend → bull steepening (belly/long outperforms); stall → bear‑flattish risk, belly vulnerable.
- USD: persistent cooling → softer drift; sticky core → firmer USD, especially vs low‑yielders.
- Equities: cooling → growth/quality tilt; stall/flip → defensives, cash‑flow stability over beta.
- Credit: cooling supports carry; watch spread beta if cadence shifts to “sooner/slower.”
Cooler‑than‑expected core: belly rally, USD softer, growth tilt ↑. Hotter‑than‑expected core: front‑end repricing, USD firmer, defensives ↑.
Common Misconceptions (Quick Fixes)
- “Headline rules policy.” — No. Headline matters for sentiment, but policy leans on Core PCE for persistence.
- “y/y is enough.” — Not in a late cycle. The 3/6‑month annualized tells you about momentum to 2%.
- “One cool print = pivot.” — The FOMC needs durability and benign revisions.
FAQ
Q1. Why does PCE often run below CPI?
A. Broader scope and substitution effects dampen volatility; healthcare imputations also differ.
Q2. How many cool prints count as “sustained”?
A. Typically two–three consecutive core coolings with benign revisions and corroborating labor easing.
Q3. Does headline matter if core cools?
A. Yes for sectors sensitive to energy/food; policy still tracks core persistence and spillovers.
Q4. Which categories to watch?
A. Services ex shelter, sticky components, and categories with past revision risk.
Q5. Why does the FOMC cite Core PCE in statements?
A. It’s the best single gauge of underlying inflation moving “sustainably” toward 2%.
Further Reading
Further Reading
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