A key gauge of services inflation touted by Federal Reserve Chair Jerome Powell is set for a surge in figures due Thursday, almost entirely due the recent run-up in the stock market.
(Bloomberg) — A key gauge of services inflation touted by Federal Reserve Chair Jerome Powell is set for a surge in figures due Thursday, almost entirely due the recent run-up in the stock market.
Prices of services excluding housing and energy, a category Powell flagged in his Aug. 25 Jackson Hole speech, may have risen as much as 0.5% in July, following more moderate 0.2% increases in each of the prior two months, according to forecasters including Omair Sharif of Inflation Insights LLC and Skanda Amarnath at Employ America.
And they expect prices of portfolio management and investment advice services, a component of the basket that largely tracks movements in stock prices, to be responsible for almost all of the acceleration. The Bureau of Economic Analysis will publish monthly price data for personal consumption expenditures Thursday morning.
For Sharif, the risk is that the acceleration in the so-called nonhousing services gauge “would underscore that the inflation path will remain bumpy and that Fed officials can’t yet have confidence that inflation will sustainably move lower to their target, especially in the part of the PCE basket that they are most closely watching,” he said Wednesday in a note to clients.
Data for May and June showing 0.2% increases in nonhousing services prices — similar to pre-pandemic rates — followed a two-year period in which they were rising at about double the pace.
In his Jackson Hole speech, Powell called the recent moderation “encouraging,” though he tied lingering inflation in the category to tight labor markets, given the labor-intensive nature of many services that comprise the basket, and indicated “some further progress here will be essential” to return inflation to the Fed’s 2% target.
What Bloomberg Economics Says…
“Fed Chair Jerome Powell’s preferred inflation metric — ‘supercore’ PCE inflation — likely accelerated in July. Unless policymakers look through the volatile drivers of that increase, it could raise the odds of another Fed hike in November.”
— Stuart Paul, Anna Wong and Eliza Winger, economists
To read the full note, click here
But a surge in July should be interpreted as an artifact of index construction rather than any signal about underlying price pressures emanating from wage growth, Amarnath said.
“If we didn’t have this portfolio management services issue, you’d be talking about a run rate that is very consistent with 2% core PCE inflation,” he said. “I don’t think of this as the kind of stuff that people think about when they think of inflation.”
Analysts have a pretty good idea of what the portfolio management services category will show in Thursday’s report because it uses similar source data as a monthly Bureau of Labor Statistics report on producer prices published Aug. 11.
Still, there is some uncertainty about the broader nonhousing services category. Sarah House, a senior economist at Wells Fargo & Co., expects the report will show the gauge rose 0.3% in July.
“I’m expecting a lift, although I’m cautious on the magnitude since other source components of finance and insurance didn’t lift nearly as much as portfolio services,” House said. “If it comes in stronger than that, though, financial services would be the first place I look for the upside surprise.”
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