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Remember when inflation felt like a five-alarm fire just a few years ago? The flames are mostly out, but the Fed is still waiting for a few hot spots to cool down, like your rent, your healthcare bills, plane tickets, and dinners out.
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The big question now is whether this is just a last mile of a cleanup or a smolder that could flare back up.
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And on today’s Stocks and Translation, we’re going to use the Fed’s favorite inflation report, the PCE index, to see how close we really are to declaring victory.
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Now, let’s start by breaking down exactly what we mean by PCE. The Personal Consumption Expenditures Price Index tracks what you pay for almost everything.
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That’s groceries, rent, streaming subscriptions, plus what others pay on your behalf, like employer health insurance.
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You might be familiar with the more common gauge, the Consumer Price Index or CPI. PCI is a little bit broader than that and usually runs a little lower because it gives less weight to housing.
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Now let’s take a look at its history and the latest results.
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This chart here goes back to 2020 and shows the main headline figure for PCE in white and the so-called core number in green. That strips out food and energy components.
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The Fed likes to look at core because it’s less noisy and shows the trend better. But the official, the Fed’s official 2% inflation target is explicitly tied to the headline number, which includes everything.
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Now notice in the middle of the chart those big peaks, right here, as both inflation numbers surged above 5% to 40-year highs.
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The Fed hit the brakes hard in 2022, raising rates to combat this. And we can see that inflation has leveled off since going sideways since early 2024.
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And according to the latest numbers from September that we got Friday, both headline and core came in at 2%, 2.8% measured from one year ago or year-over-year. So they finally converge to the same level at the right edge of this chart.
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Now, let’s also take a look at that dotted white line here because that is the Fed’s 2% inflation target. Uh, if both the headline numbers and cores are stubbornly sticking above that line as they are, well, this is then the Fed’s last mile problem.
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And it’s about the services that you can’t easily cut, like your dentist, your insurance bill, and that plane to get home for the holidays.
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Now let’s break down the so-called supercore inflation.
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When the Fed was aggressively hiking rates in 2022, Powell kept pointing to core services excluding housing. That’s what we shorthand as supercore.
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Think of it as the wage heavy part of the economy, healthcare, financial services, travel, dining out, recreation.
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If rate wages are running hot, this is where you see it in prices.
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And now let’s take a look at how supercore has run since 2020. And here’s a backstory. Supercore surged to around 5% in the pandemic boom in the middle of that chart again, and has come down a lot.
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But we just learned it’s still sitting around 3.3%. It’s been going sideways since last year and has stubbornly remained higher than the headline and core PCE numbers, and much higher than the Fed’s 2% general inflation target.
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And if you look inside the latest report from the BEA, almost all of the spending growth came in September from services, housing and utilities, healthcare, financial service, dining out.
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The stuff that you can touch, what we call goods, those were actually flat.
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So to put it all together, you’ve got paychecks creeping higher, people still paying for services that they can’t ditch, and prices in those categories just refusing to cooperate with the Fed.
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So what should you be watching on the inflation front into year end?
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First, we got a big Fed decision out Wednesday, December 10th and a Wall Street, Wall Street has baked in a rate cut.
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So the drama itself is not going to be about the move, it’s going to be about the split inside the room and what Powell says at the presser and how he describes the inflation threat.
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We’ve got a block of officials who are worried that cutting too fast could light up services inflation again. And another block saying, look, growth is cooling down, so we need to ease off the brakes.
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And then we get a number for uh, November CPI on Thursday, December 18th.
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If it comes within expectations and doesn’t change too much, the markets will lean into a bigger rate cutting cycle next year, 2026, especially with the prospect of a more dovish Fed chair after Powell’s leadership ends in May.
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Finally, keep an eye on bond yields and rate cut odds. They are the real-time vote on how quickly the Fed can tiptoe from today’s services stickiness to that new 2026 Fed that the administration would just love to lean dovish.
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And tune into the Stocks and Translation podcast for more jargon-busting deep dives. New episodes can be found Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcasts.