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The Fed could be stuck with conflicting signals from CPI and PCE

PCE core y/y

The Fed’s mandate is to keep inflation near 2% but which inflation measure? The Fed looks at both CPI and PCE but its preferred measure is PCE.

Today’s core CPI number rose 0.39% month over month but that won’t be repeated with the PCE report, according to a note from Morgan Stanley. In a note to clients after CPI, they say that adjustments in core PCE will mean it rose 0.29% m/m.

While that would push the six-month core CPI number to 2.2% from 1.9% (annualized), it’s not far off of the Fed’s target. It also may be a reason that Fed officials don’t overreact to today’s CPI data.


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