The Federal Reserve tracks the Personal Consumption Expenditures price indexes for its 2% inflation target.
Some of the PPI components feed into the calculation of the PCE inflation measures. But beginning in August, the government is making changes to how it calculates prices for the volatile portfolio management and investment advice services, legal services, and computer software and accessories, which will change the impact of the PPI on PCE inflation.
The portfolio management component, which has contributed to large swings in the PCE price index excluding food and energy, will be replaced with an imputation.
"At the same time, new PPI-based estimators for household legal services and computer software will be added," said Lou Crandall, chief economist at Wrightson ICAP. "We'll have less confidence than usual in the translation from the PPI data to the PCEPI contribution for August as a result."
Economists at Morgan Stanley believed the methodology revamp could result in downward revisions to PCE inflation data for the first four months of the year, but not meaningfully change the numbers for May through August.
"As a result, we estimate that the 12-month and six-month annualized rates of core PCE inflation through July could be revised down to roughly 3.1% and 3.2%, respectively, from 3.3% and 3.5% currently," they wrote in a note. "Given that we do not expect meaningful revisions to the May-July monthly prints, the three-month annualized pace through July should therefore remain broadly unchanged at around 3.0%-3.1%."
Some Fed officials are focusing on the three-month change in PCE inflation. The Bureau of Economic Analysis will publish the updated PCE inflation data together with the annual revisions to gross domestic product figures on September 30.
Rate-hike expectations remain in focus
With inflation still running above target and the labor market regaining its footing in August, some economists argued that the Federal Reserve should raise interest rates next week to underscore its independence. They said uncertainty over what the U.S. central bank was going to do had contributed to boosting long-term Treasury yields.
"(Fed Chairman) Kevin Warsh's hawkish Jackson Hole speech gives him little wiggle room at the upcoming meeting," said Scott Anderson, chief economist at BMO Capital Markets. "If he wants to keep inflation-fighting credibility with the bond market, he will be forced to act if all the data, especially inflation, are pointing in the same direction—toward a hike."
Ahead of the PPI report, financial markets saw a roughly 62% chance of a 25-basis-point rate hike at the Fed's Sept. 15-16 meeting, according to CME's FedWatch tool. The central bank's benchmark overnight interest rate is currently in the 3.50%-3.75% range.
Producer prices rise in line with forecasts
WASHINGTON, Sept. 10 (Reuters) - U.S. producer prices increased in line with expectations in August amid a rebound in the cost of energy products.
The Producer Price Index for final demand rose 0.4% last month after an upwardly revised 0.1% gain in July, the Labor Department's Bureau of Labor Statistics said on Thursday.
Economists polled by Reuters had forecast the PPI increasing 0.4% after a previously unchanged reading in July. In the 12 months through August, the PPI advanced 5.4%. That followed a 4.8% rise in July. Energy prices increased 4.2% over the month as renewed hostilities between the United States and Iran boosted oil prices. Energy prices had declined for two straight months. Wholesale food prices edged up 0.1% after dropping 0.9% in July.
Producer goods prices surged 1.1%. They rose 0.4% excluding the volatile food and energy components. Services prices nudged up 0.1%, though some components showed strong gains.
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