"Core" PCE1 inflation year over year eased from a recent high of 2.04% last July to 1.55% in March. This easing has made some market participants speculate that the US Federal Reserve will ease up on monetary policy. However, there’s more than one way to measure inflation.

Eliminating the noise

Headline PCE inflation measures price changes in all consumer goods and services. The Fed targets headline PCE inflation over the long term. In the near term, it tends to focus on "core" inflation, which excludes food and energy prices. Food and energy prices are connected to highly volatile commodity prices, which can cause headline PCE inflation to fluctuate wildly in short periods of time.

The Fed wants to discard the noise and get the true signal of inflation. “Core” PCE inflation strips away the noise from food and energy. According to this measure, everything else, then, is signal.

The problem is that sometimes food and energy prices behave well. And sometimes, there are flukes and outliers elsewhere in consumer prices. For example, last January, the price index of financial services saw a huge drop, probably related to the stock market slump in autumn 2018. Last March, the Bureau of Labor Statistics introduced new “big data” methods, which contributed to a record drop in apparel prices. Two years ago, Verizon’s aggressive promotional campaign led to a huge drop in cell phone service prices.