The Zhiguan Finance APP has learned that, including Chairman Jerome Powell, senior officials of the Federal Reserve are increasingly relying on a lesser-known price indicator — "market-based" inflation — as the basis for their optimistic economic outlook. This indicator excludes some service prices that can only be estimated due to difficulties in direct measurement, resulting in a trend that differs from the central bank's preferred core inflation indicators in recent months.

Although the core inflation index accelerated to 2.8% in November, the market-based inflation indicator has remained stable at around 2.4% since May. This distinction is particularly important against the backdrop of investors' disappointment over the Federal Reserve's potential rate cuts in 2025 and rising U.S. Treasury yields.

Federal Reserve Governor Christopher Waller outlined the reasons for paying attention to this alternative indicator in a speech on Wednesday and expressed support for further rate cuts this year.

He pointed out that inflation in 2024 is primarily driven by the rising prices of estimated costs, such as housing services and non-market services, which have lower reliability because they are based on estimates rather than direct observation. The latest minutes from the Federal Reserve's meeting also show that several policymakers agree with Waller's views.

The market-based personal consumption expenditures price index excludes multiple items that government statisticians must estimate, such as portfolio management and Consulting Services, Insurance, etc., as the actual prices of these services are difficult to observe.

In addition, categories such as gambling, free financial services, life Insurance, Medical and hospitalization services, net motor vehicle and other Transportation Insurance, as well as net overseas travel are also excluded.

Powell and Federal Reserve officials such as Adriana Kugler have acknowledged that these "non-market services" are a factor in the recent rise in inflation.

However, Anna Huang, chief USA economist at Bloomberg Economics, stated that estimated prices do not provide leading predictive signals, so the Federal Reserve may overlook these price changes.

For example, in the 12 months ending in November, the costs of motor vehicle and other Transportation Insurance rose by 6.5%, reflecting catch-up inflation after the surge in automobile prices, but from the Federal Reserve's perspective, this increase may be overlooked.

The Bureau of Economic Analysis will release the December PCE inflation data on January 31, at which point the market will have a more comprehensive understanding of the latest dynamics of this market-based inflation Index.

Editor/ping