The gap between Core PCE (3.3%) and Core CPI (2.5%) inflation is driven by how each index weighs shelter and measures financial services. CPI gives more weight to disinflating shelter, while PCE is inflated by a stock market-linked measure for financial services.
The Bureau of Economic Analysis will soon change how it calculates financial services prices for the PCE deflator. It's moving from a stock market-based measure to one based on wages, a change expected to reduce year-over-year Core PCE by 0.1-0.2 percentage points.
"SuperCore" inflation, which measures services excluding energy and shelter, is a key metric for gauging underlying price pressures tied to the labor market. Currently at 2.8% year-over-year, its moderation is seen as a positive sign that inflation is heading in the right direction.
The Trimmed Mean CPI, which removes price extremes, is criticized for being unhelpful in the current environment. By design, it cuts out the very supply shocks (e.g., energy, food prices) that are the primary drivers of inflation, leaving a distorted picture dominated by housing.
While futures markets price a 75% probability of at least one Fed rate hike by March 2027, Moody's economists see this as unlikely. They place much higher odds on a "no change" scenario, with some even seeing a 25-35% chance of a rate cut driven by economic weakness.
Prices for domestically produced farm food have outpaced overall food inflation, rising 32% since 2020. This specific aggregate within the CPI data reflects concentrated pressures from both higher energy costs for transport and tighter labor markets possibly linked to immigration policy.
The significant 16.4% decline in lettuce prices is attributed to a demand-side story rather than improved supply. Consumers actively avoided lettuce following an outbreak, demonstrating how specific, non-economic events can cause sharp, temporary price swings in inflation data.
The latest retail sales report revealed a surprising 2.2% monthly decline in non-store (online) retail. This weakness cannot be blamed on falling gas prices and suggests a significant consumer pullback in July, corroborating other alternative high-frequency spending data.
After accounting for measurement quirks in both CPI and PCE, the podcast's economists converge on an estimate for "true" underlying inflation around 2.7-2.8%. This consensus view suggests that while official measures are noisy, the underlying trend is still meaningfully above the Fed's 2% target.