Fed officials, including Chairman Powell, are increasingly focusing on a lesser-known and relatively ambiguous price indicator - market-based inflation, which they view as a reason to maintain confidence in the inflation outlook in the USA.

The market-based inflation indicators exclude a range of service industry data, which cannot be directly measured by data collectors and must be estimated. Specifically, the market-based version of the Personal Consumption Expenditures Price Index (PCE) excludes several items that government statisticians must estimate or infer since they cannot observe the actual prices consumers pay for these services:

Among them, portfolio management and investment advice are important items that are not included, mainly tracking US stocks, which means that the recent rise in US stocks over the past few months is considered to have pushed up inflation under the PCE.

Additionally, several types of insurance are also excluded. For example, a category intended to reflect the costs of automobile and other transport insurance rose 6.5% year-on-year in November, partially reflecting catch-up inflation after the surge in car prices in 2021 and early 2022.

The inflation situation in the USA demonstrated by market-based inflation indicators in recent months is not consistent with the trends reflected in other important inflation data. For example, the Fed's preferred inflation indicator accelerated to 2.8% in November, but the market-based inflation indicator has essentially remained around 2.4% since May of last year.

Due to the stickiness of inflation in the USA, current investor expectations for the Fed to cut interest rates in 2025 have become pessimistic, and US Treasury yields continue to rise. After the release of stronger-than-expected ISM services PMI and JOLTS job openings data this week, traders are no longer fully betting on the Fed cutting rates before July.

Analysis indicates that the differences between market-based inflation Indicators and more commonly used inflation Indicators such as core PCE are noteworthy. Although Federal Reserve officials have stated that they need to see more progress towards the 2% inflation target before lowering interest rates again, officials have recently mentioned alternative inflation Indicators several times, and this Indicator, which is closer to the Fed's 2% inflation target, may suggest that the threshold for further rate cuts is actually lower.

This week, Fed voting member and Governor Waller predicted that inflation will continue to cool, elaborating in his speech on the reasons for focusing on market-based inflation Indicators, and expressing support for further rate cuts this year:

Inflation in 2024 is largely driven by rising estimated prices, such as housing services and non-market services, which are estimated rather than directly observed, and I believe their guiding role in the supply-demand balance of all goods and services in the economy is less reliable.

Powell also mentioned items like 'non-market services' in a press conference on December 18 as a factor in the recent rise in inflation. Fed Governor Adriana Kugler had similar statements in a CNBC interview on January 3. The minutes from the Fed's December meeting, released this Wednesday, indicated that many policymakers concur with Waller's views.

Bloomberg's chief economist for the USA, Anna Wong, stated that the reason for abandoning inferred projects is that they do not actually provide forward-looking predictive signals to indicate the direction of inflation. Regarding the aforementioned Insurance cost-related inflation, Wong pointed out that from a personal perspective, this inflation is real, but from the Fed's perspective, they will scrutinize it closely.

Recent reports indicated that Trump's advisors are considering how to reshape the leadership of the Fed. Trump's advisors have also begun drafting a potential successor list to take over from Fed Chair Powell in May 2026, focusing primarily on comments made by current Fed officials regarding interest rates, thereby adjusting candidates accordingly.

Editor/Somer