The Fed is due for another set of economic forecasts this week and one interesting spot will be core inflation.
The current central tendency is 3.7-4.2% and it looks like the December reading will be below the low end of that range, according to Morgan Stanley.
For core inflation to hit the Fed’s projection, Morgan Stanley economists’ estimates indicate it would need to increase at a 4.5% annual rate in the final four months of this year, after rising at a 2.6% rate over the prior four months. The August PCE report is due on September 29 and the early consensus is +0.2% m/m, the same as in July.
The WSJ highlights that Goldman Sachs and JPMorgan both now see 3.4% y/y core CPI in 2023, well below the Fed at 3.9%.
The question is whether that even matters for the Fed? Officials are watching oil prices run right now and that could filter back into inflation later. The question that matters now is 2025 core inflation and that's the forecast we should be watching for on Wednesday. The current central tendency is 2.5–3.1%, which isn't terribly above the Fed's target but even a tick or two in either direction would be notable.
I would be curious to hear how Powell reacts if he's quizzed on his views on core inflation and why it's undershot and how persistent that might. A big help next year will be the lagged effect of rents, which should go from being a boost to numbers to a drag, especially given the latest bump in interest rates.