Fed Turns to Market-Based Inflation for Policy Insights
Top Federal Reserve officials, including Chair Jerome Powell, are increasingly citing market-based inflation as a key indicator. This alternative measure excludes imputed prices for services like housing and insurance, offering a clearer picture of inflation trends.
How Market-Based Inflation Differs
Unlike the traditional Personal Consumption Expenditures (PCE) index, the market-based version omits estimated prices that lack direct consumer data. This includes:
- Housing services
- Investment advice and portfolio management
- Transportation insurance costs
By excluding these imputed categories, the market-based inflation metric has remained steady at 2.4% since May, compared to the broader measure’s 2.8% in November.
Why the Shift Matters
Fed officials, including Governor Christopher Waller, argue that imputed prices do not reflect real supply and demand dynamics. Waller highlighted in a recent speech that such prices lack predictive value, making the market-based gauge a more reliable tool for forecasting inflation trends.
Impact on Interest Rate Policy
The focus on market-based inflation could:
- Lower the bar for additional interest rate cuts in 2025.
- Support the case for easing monetary policy sooner, despite the broader inflation gauge showing slower progress toward the Fed’s 2% target.
Minutes from the Federal Reserve latest meeting reveal that many policymakers share Waller’s perspective, signaling a potential shift in how inflation data informs decisions.
Powell and Kugler Weigh In
Powell acknowledged the influence of non-market services on inflation during a Dec. 18 press conference, calling these categories less indicative of future trends. Similarly, Governor Adriana Kugler reiterated this view in a recent CNBC interview, aligning with the Fed’s evolving approach.
The Bigger Picture
Market-based inflation offers a more consistent outlook amid volatile economic indicators, like rising Treasury yields and slowing interest rate cuts. December’s PCE data, set for release on Jan. 31, will provide further clarity on inflation trends as the Fed navigates its 2025 policy path.