Feb. PCE Preview: The Path to Lower Inflation May Be on Hold Before Gaza Ceasefire Agreement Takes Effect

The Bureau of Economic Analysis will release the Personal Consumption Expenditure stats and the price index at 8:30 ET on Friday.The PCE deflator is expected to rise slightly from 2.4% to 2.5%, and the core PCE price index is expected to remain at 2.8%.

The CPI released earlier this month showed that energy prices increased by 2.3% month-on-month in February, which is an important factor in the stickiness of inflation. However, there are some indications that US inflation has room to continue to decline in the future, although it may not be immediately reflected in the PCE price index in the short term.

The U.S. housing market continues to normalize slowly. The Commerce Department's report from Monday indicated that the median price of new homes last month dropped to its lowest point in over two and a half years, with the inventory reaching its highest since November 2022. In response to market conditions, builders are ramping up construction, providing discounts and other incentives, and reducing the size of new homes to improve affordability.

Last week, the government announced that the number of housing completions in February soared to a 17-year high. With additional new homes expected to enter the market, this could apply further downward pressure on house price inflation. The current inventory breakdown shows that homes still under construction represent 58.7%, those yet to be built constitute 22.9%, and completed homes make up 18.4% of the supply.

In addition to outright home purchases, Zumper's monthly report shows rents also fell year-over-year in February. Rents have fallen more sharply in the heavily supplied sunbelt area.

U.S. new car inventories have soared this year. A Cox Automotive report showed that as of March 4, new car inventories soared to 2.74 million units, 52% above a year ago and higher than the previous month’s measure of 2.61 million.

The average transaction price (ATP) of a new vehicle last month was $47,244, according to Kelley Blue Book, down 2.2% from February 2023 and down 5.4% from the market peak in December 2022.

Discounts and incentives in February averaged 5.9% of ATP, up from 5.7% in January and significantly higher than the average 3.1% recorded in February one year ago. Increased supply of new and used cars may lead to the continued decline in vehicle inflation.

Energy prices have been influenced by geopolitics. The United Nations Security Council passed a resolution calling for a ceasefire in Gaza on March 25. This is the first time since the Gaza war broke out in October last year that the Security Council has passed a resolution explicitly calling for an immediate ceasefire. Several previous draft resolutions have been rejected.

The resolution means Israel is now "obligated to cease military operations for the next 15 days". Oil prices fell after the United Nations finally approved a ceasefire agreement in Gaza.

Meanwhile, industry data showed that US crude stockpiles jumped by 9.337 million barrels last week, reversing from a 1.519-million-barrel decline in the preceding week and marking the biggest weekly increase since February last year. The US Department of Energy also reported that crude inventories in the Strategic Petroleum Reserve rose by another 0.7 million barrels to 363 million barrels as of March 22, the highest level since April 2023.

What will be announced on the same day is the month-on-month personal income in February. The 1.0% growth rate in January once exceeded market expectations. The strongest increase in personal income in a year primarily reflected increases in government social benefits, personal income receipts on assets, and compensation.

Whether the high growth rate will continue in February is also a focus of the market. Hiring, wage growth and an increase in hours worked will likely boost personal income. Economists polled by Bloomberg estimate personal income rose 0.5% during the month.

The fundamental outlook of Powell and his colleagues is that the economy is sufficiently strong to withstand increased interest rates. Powell appears to be less perturbed by recent high CPI figures than the markets are, and he remains acutely aware of potential risks in the labor and credit markets. Concerns about such "unexpected" events are always present in his considerations.

Bloomberg's economist Anna Wong predicted that the core PCE inflation would fall to 2.5% or lower by June or even earlier. This means that inflation is likely to become slightly less important, while unemployment will become more crucial.