Core PCE is likely to fall given the PPI components

All the inflation news this week isn't as bad as it seems.

Nick Timiraos from the WSJ and Samuel Tombs from Pantheon highlight that the components from PPI that go into PCE were "a game changer" for core PCE.

"Those PPI numbers were a game-changer for the January core PCE print. We're now tracking 0.28% m/m, 2.6% y/y (down from 2.8% in Dec.) All the healthcare and insurance PPI components were weak and airline fares prices fell sharply. About as good as the Fed could have hoped for," writes Tombs.

Timiraos writes:

Because the PPI components that feed into the PCE index (financial and healthcare services) were soft in January, the core PCE index is estimated to print well below the big 0.45% increase in the CPI. A 0.27% increase in core PCE for Jan would drop the Y/Y rate to 2.6% from 2.8%

The PCE report is due on Feb 28.

Notably, this is what Powell said yesterday:

The CPI reading was above almost every forecast. But I would just offer a note of caution on this -- two notes of caution. One is we don't get excited about one or two good readings, and we don't get excited about one or two bad readings. The second thing, though, is we target PCE inflation because we think it's simply a better measure of inflation. And so you need to know the translation from CPI to PCE, and we get more data on that. Tomorrow we'll get the producer price index. So, I think it's always wise. And the people who follow us closely know this, that we'll know actually what the PCE readings are late tomorrow.