Federal Reserve's Key Inflation Indicator Expected to Drop to Seven-Month Low

Core PCE Inflation Slows as Economic Conditions Remain Tenuous / Broomgerg

The Federal Reserve's favored measure of inflation is anticipated to ease to its slowest rate since June. Despite this promising sign, the gradual progress in controlling inflation will likely prompt policymakers to remain cautious about further reductions in interest rates. The core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, is projected to increase by 2.6% year-over-year through January, based on upcoming data from the Commerce Department. Additionally, overall PCE inflation is expected to show a similar downward trend, as indicated by the median forecast from economists surveyed by Bloomberg.

This expected decline is likely driven by categories that have remained relatively stable, as per recent wholesale inflation data that influences PCE calculations. However, components that have experienced significant increases in the consumer price index are expected to keep PCE inflation above the Federal Reserve's 2% target. This situation remains a major factor for officials who are inclined to maintain interest rates at their current levels for now. Notably, Michael Barr, the central bank's vice chair for supervision, is set to speak publicly for what may be the last time before he steps down at the end of the month, along with remarks from Richmond Fed President Tom Barkin and Cleveland Fed's Beth Hammack.

In conjunction with the PCE report, the Commerce Department will also release the latest goods-trade balance, which expanded to a record high in December. This trade balance will be an important point of focus for President Donald Trump during his second term. Upcoming data releases will include new-home sales figures, consumer confidence metrics, and a second estimate of fourth-quarter economic growth.

Investors are expected to keep a close watch on Trump's tariff strategies and Elon Musk's initiatives aimed at reducing the size of the federal government. According to Bloomberg Economics, the anticipated personal consumption data is likely to reflect a contraction in personal spending for January, while core PCE inflation is projected to decelerate to 2.6% year-over-year. The "Trump Trade," which is essentially a bet on rising inflation, may start to appear less attractive under these conditions.

In Canada, gross domestic product data for the fourth quarter is likely to reveal an economy gaining momentum following aggressive interest rate cuts, although this growth may face challenges due to potential trade conflicts impacting business investments.

Looking ahead to the Asian markets, the Bank of Korea will be under scrutiny next week as it decides whether to resume its cycle of interest rate cuts. While many economists are forecasting an easing to stimulate domestic demand and counter potential tariff impacts on exports, uncertainty looms after comments from Governor Rhee Chang-yong, who indicated that a rate cut is not guaranteed.

On the following day, the Bank of Thailand is expected to maintain its benchmark interest rate at 2.25%, though there are expectations of further pressure for cuts later this year. The Reserve Bank of Australia, having just implemented its first rate cut since 2020, will soon receive consumer inflation data, which is forecasted to show a modest increase in price gains for January. Japan will release consumer price index data for Tokyo, likely indicating continued inflationary pressures in the capital.

Additionally, Sri Lanka will announce its CPI statistics, while China is set to publish preliminary PMI data, which will be closely monitored for signs of recovery in manufacturing following a dip during the lunar holiday in January. Taiwan's preliminary GDP figures for the fourth quarter will also be released, alongside trade data from various nations including the Philippines, South Korea, and Thailand.

In Europe, the focus will shift to the implications of the recent German election. The pro-business CDU/CSU bloc is anticipated to secure the largest share of votes, with discussions expected to center around the nation’s economic performance under Chancellor Olaf Scholz. Upcoming reports on business sentiment, including the Ifo index, are expected to reveal the highest readings since October.

Key monetary policy discussions will also take place, including the European Central Bank's upcoming decisions and potential implications for inflation across major economies in the eurozone. In the UK, multiple speeches from Bank of England officials are scheduled, contributing to the broader discourse on economic policy and inflation trends.

In South Africa, a release on Wednesday is expected to show an uptick in inflation rates for January, as this will mark the first report since a revision of the consumer price index. The upcoming G20 finance minister-central bankers summit in South Africa will draw attention amidst ongoing tensions related to U.S. trade policies and the domestic political climate.

Overall, the economic landscape remains complex as nations navigate various pressures, from inflation trends to trade policies, impacting both local and global economic stability.