Mar 2024 PCE Estimate
The market was unpleasantly surprised by the Mar CPI which came a notch above expectations for both headline and core MoM and YoY. This is actually a 3rd month in a row of higher-than-expected CPI reads.
Then, when everybody was bracing for Mar PPI to miss expectations as well, it came cooler than expected following 2 higher-than-expected PPI reads in Jan and Feb.
As a result of the 3 higher-than-expected CPI reads in a row, the market lowered its expectations of Fed cuts in 2024 from 3 to 2. Some have suggested the Fed shouldn’t cut at all because of the recent CPI data. There are even some out-of-consensus individuals (like Larry Summers) who suggested the Fed should actually hike, not cut rates.
People who suggest no cuts or even hikes in 2024 have often cited current headline CPI at 3.5% YoY and core CPI at 3.8% YoY being well above the Fed’s target. A common misconception is that the Fed is targeting CPI inflation at 2%. Actually, they are targeting PCE inflation at 2%. Current (Feb) headline PCE at +2.5% and core PCE at +2.8% are much closer to their target than CPI figures suggest. So, PCE inflation is more important to the Fed than CPI which puts even more weight on the upcoming Mar PCE.
In Jan and Feb PCE figures were more favorable than the CPI and PPI.
Will we see the same in Mar?
My Mar PCE estimates are…
+0.3% MoM and +2.6% YoY for headline and +0.3% MoM (just barely) and +2.7% YoY for core. Here are my unrounded estimates:
If my estimates are correct, we would have the lowest headline and core PCE MoM this year, core PCE YoY would continue to go down for the 14th month in a row, while headline PCE YoY would go up notably.
What would that mean for the Fed?
The Fed would likely see core as favorable but headline would likely be seen as less favorable. Headline PCE was at +2.4% in Jan, and in Mar, if my estimates are correct, it will be 0.2 pp higher at +2.6%. Not the end of the world, but also not something that would give the Fed enough confidence to start contemplating an immediate cut. With that in mind, May is most likely off the table, while before they decide for Jun and afterwards they will need to see more inflation data.
The next big thing after Mar PCE will be Fed’s meeting Apr 30-May 1. Before each Fed meeting I write Marko’s Fed Report which, among other things contains:
Detailed soft landing analysis including economic growth, labor market and inflation,
Analysis of the monetary policy lags including when they might start biting more seriously and
Forward looking view on the economy, including PCE (headline and core) trajectory in 2024
Marko’s Fed Report is part of premium Arkomina Research.
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Awesome!