Core-Cast is our nowcasting model to track the Fed's preferred inflation gauges before and through their release date. The heatmaps below give a comprehensive view of how inflation components and themes are performing relative to what transpires when inflation is running at 2%.
Most of the Personal Consumption Expenditures (PCE) inflation gauges are sourced from Consumer Price Index (CPI) data, but Producer Price Index (PPI) input data is of increasing relevance, import price index (IPI) data can prove occasionally relevant. There are also some high-leverage components that only come out on the day of the PCE release.
Summary:
The PPI inputs to PCE broke the wrong way relative to CPI and thus make the monthly core PCE reading for July solid but still less remarkable. We have had to revise our core PCE nowcast up by 12 basis points and our supercore nowcast by 22 basis points. The lone culprit for such a spike? Producer Prices for portfolio management and investment advice. It's perhaps the most empirically compelling mechanism by which Fed hikes lower core PCE readings, and also among the quirkiest. These "prices" tend to fall when financial conditions tighten and tend to rise when financial conditions ease, but this month reflected a more outsized spike. The rest of the PPI inputs generally came in line with yesterday's nowcast.
The inflation data continues to underperform FOMC members' projections in June for 2023Q4 year-over-year core PCE inflation, and more consistent with their March projections. While yesterday's CPI still should end the prospect of a September hike, today's information makes the disinflation trajectory look far less decisive and thus the June dots will remain roughly unchanged (signaling one more hike). We still maintain a baseline outlook that takes core inflation outcomes close to 2% in the summer of next year (without requiring recession).
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