Matthew Boesler
BloombergDecember 16, 2022

  • ‘Extremely strong December numbers’ implicit in new projection
  • Officials may not have updated numbers after Tuesday CPI data

The Federal Reserve’s updated economic projections this week appeared to incorporate an assumption that raised eyebrows: inflation would prove resurgent at the end of this year.

The quarterly projections showed Fed officials now expect so-called core inflation — which excludes food and energy — to end this year around 4.8%, up from the 4.5% figure they forecast in September. Yet that number looks much too high to Wall Street economists following a surprisingly-soft Labor Department release on consumer prices Tuesday, even though Chair Jerome Powell said it was reflected in the projections.

So the next two inflation reports will be make-or-break. “To reach their 2022 forecast, implicitly they have extremely strong December numbers for inflation written in,” said Alan Detmeister, an economist at UBS Securities.

Tuesday’s report showed the consumer price index, excluding food and energy, rose just 0.2%last month, below the median estimate in a Bloomberg survey. The Fed states its projections — and its 2% target — in terms of the Commerce Department’s personal consumption expenditures price index, and November data for that won’t be published until Dec. 23.

Even so, forecasters are quick to produce estimates for PCE inflation once the CPI data are published, because both measures utilize many of the same underlying sources of information. Economists at JPMorgan, for example, estimate core PCE prices probably rose about 0.1% in November, based on the CPI report and another Labor Department report on producer prices.

In October, core PCE prices were up 0.2%. Putting together the actual October number with the estimated November number leaves a December number that would have to buck the downtrend of recent months in a big way.

In particular, a 0.1% increase in November would require a 0.7% jump in core prices in December for the Fed to hit its 4.8% number for the year. Even a sizable 0.4% increase in December might translate to just 4.6% for the annual figure.

While no one knows what the December data — which won’t be published until the end of January — will show, “you need a real story” to get to those kinds of numbers, said Steven Englander, the head of global G10 FX research and North America strategy for Standard Chartered Bank.

And given the way goods inflation has been cooling and housing inflation is getting closer to decelerating, “if Powell thought that that was going to happen, I think it would have been incumbent for him to say, don’t be misled because December’s going to be a whopper,” Englander said.

Detmeister, who spent 15 years at the Fed before joining UBS, said the November CPI report published on Tuesday — 90 minutes before the Fed began its two-day policy meeting this week — probably didn’t arrive in time for Fed officials to adjust their forecasts, despite Powell’s insistence that it did.

“It’s never the case” that the projections “don’t reflect an important piece of data that came in on the first day of the meeting,” Powell said during a press conference Wednesday.

Update Window

Officials initially submit their projections the Friday before the meeting, and then have a chance to update them until Tuesday night, before day two of the meeting begins.

But “they very rarely do,” in part because that would also potentially necessitate revisions to projections for other things like interest rates and unemployment, Detmeister said. “Very few of them would have probably gone ahead and updated their submissions and really worked out what it would’ve taken in December to hit that target.”

Others do see scope for faster increases in the PCE data over the next two months, however.

Sarah House, a senior economist at Wells Fargo & Co., said core PCE could have risen 0.3% in November, which would then require only a similar print in December for the Fed’s 4.8% number to be achieved.

House is on the lookout for upside surprises in the volatile financial services category in the PCE data — a category which is based on movements in financial markets, is notoriously hard to forecast and is not included in the CPI report.

“Unfortunately, it’s not quite as neat and clean as a lot of the other categories in terms of, ‘OK, if the CPI and PPI did this, you can expect this sub-component to do that,’” House said. “And so I think that’s probably where some of the uncertainty and risk lies.”

New York Fed President John Williams, speaking Friday in an interview on Bloomberg Television, said there had been some recent favorable developments around inflation, citing improvements in snarled supply chains and softer goods prices, though he pointed to other areas where inflation is still high.

“Where inflation is still high is in these core services areas, the areas that are probably going to be more persistent and really reflect the imbalance between supply and demand in the labor market and the overall economy,” he said. “This is the area that’s not coming down and we definitely need to see it coming down to get to that 2% inflation goal.”