Jul 2024 PCE Inflation Estimates

In Q1 2024 CPI was higher than expected. Then in Q2 CPI was mostly cooler than expected driven by exceptionally cool May and Jun. The latest Jul month came in line when looked at the 1st decimal place, but generally cooler than expected when looked at the 2nd decimal place. Headline was cooler YoY even after rounding it up.

Jul CPI was again almost in line with my estimates. Headline CPI came in +2 bps (+0.02 pp) above my estimates, while core CPI came in +1 bps (+0.01 pp) above my estimates:

PPI has been even more volatile YTD. It managed to beat expectations fully only in 2 of the 7 months so far (May and Jul), while it also beat expectations for headline PPI (but missed for core) in Mar. Although it looked like we had 2 MoM deflations recently, after revisions all 7 months are positive MoM.

Unlike CPI and PPI which were more volatile and mostly higher than expected in the first months of 2024, PCE mostly came in line with expectations YTD with even 2 beats for core PCE in Feb and Apr, but also one miss for core in Jun.

CPI came mostly in line in Jul (when looking at figures rounded to 1 decimal point) except for the headline YoY which came in cooler than expected. At the same time PPI came in cooler than expected. What does that mean for Jul PCE inflation?

More importantly, what does that mean for the Fed?

My Jul PCE estimates are…

• Headline PCE

  • 0.1% MoM and +2.5% YoY

• Core PCE

  • +0.1% MoM and +2.6% YoY

My unrounded estimates are:

If my estimates are correct, we would see no progress on headline and core PCE in Jul. Still, that should be enough for the Fed to cut rates in Sep, which at this point seems pretty much baked in. The jury is still out there on how much they will cut. This will depend on more data, namely Aug jobs numbers and Aug CPI.

Now the question is what will the Fed do after Sep. Some say they will do a 25 bps cut at each subsequent meeting, others say they will do one and done because the economy is still strong. The 1990s playbook seems to be what some market participants expect. As a reminder, in 1995 the Fed first made one 25 bps cut in Jul and then did nothing until Dec when they made another 25 bps cut, followed by another 25 bps cut in Jan 1996. So these were three 25 bps cuts in 7 months after which the Fed held rates steady for 14 months. Will we see similar scenario play out here? Or the Fed will continue to cut rates mechanically at every other meeting? Or it will cut rates at an accelerating pace?

The answer to this depends on the forward PCE trajectory and forward unemployment rate trajectory.

---

1. Analysis of what the Fed has done so far

2. Comprehensive analysis of the economy giving the answer to which landing we are in

3. Analysis of monetary policy lags

4. PCE forward trajectory (headline and core until the end of Q1 2025)

5. Unemployment rate forward trajectory (until the end of Q1 2025)

6. What will the Fed likely do in Sep and why

7. What will the Fed likely do after Sep and why

Marko’s Fed Report is part of premium Arkomina Research Pro Investor.

To subscribe click this link here.

---

DISCLAIMER

These articles are for discussion and educational purposes only.

Past performance is no guarantee of future results.

Although specific securities and economic forecasts may be discussed in articles, you should NOT construe any comment as a call to buy or sell any security, or as a legal, tax, investment, financial or other advice. Consult your own advisors if you require such advice.

ANY USE OF THESE ARTICLES IS AT YOUR OWN RISK AND LIABILITY. Neither Arkomina Consulting Ltd nor Marko Bjegovic as its director or any employee, accepts any liability whatsoever for any direct, indirect, consequential, moral, incidental, collateral or special damages or losses of any kind.