Daily Briefing 3/28/25
Consumer Prices (BEA)
The PCE deflator increased by 0.33% in February 2025 from January, nearly matching the previous month’s 0.34% increase and December’s 0.30% change. From last February, the price index increased by 2.54%, nearly the same as the 2.52% before. The core index gained 0.37% on the month, faster than expectations (0.3%) and the previous month’s 0.30%. On a yearly basis, the core deflator added 2.79% vs. 2.66%.
Interpretation
Core prices came in “hotter” than expectations, which wasn’t a total surprise after the BLS’s Producer Price Index (PPI) contained some unwelcome results. Services categories, in particular, which feed into the BEA’s consumer price deflator showed faster price changes than the overall CPI had. Reaction to the updated estimates was still muted.
Bond rates were down sharply today largely influenced by the personal spending estimates (also ignoring income data, or the substance behind them) which emphasized the downside economic risks rather than any additional “inflation” fears that may have been represented in the core deflator. For the time being, however, policymakers at the Fed aren’t likely to remain too silent, with several already having expressed reservations about further price acceleration and how that might, in their view, possibly re-ignite “inflation.”
Instead, the higher any prices go in the short run – tariffs or for some other reasons – the more the consumer economy will take the hit. Smaller and medium-sized businesses will also be negatively impacted.
In many ways, the PCE deflator is “old news.” Not only did the CPI and even the PPI for February steal the spotlight, mainstream attention has shifted focus to more macro dynamics. Putting together corporate reports and the plethora of warnings contained within them with these and other macro accounts show the risks in the economy have decisively shifted in the direction of weakness.
Consumers have consistently indicated they cannot absorb higher prices for anything. Where they’ve been implemented, volume has immediately disappeared. That’s not inflation, rather demand destruction. So, again, the deflators are, to the markets, old news. For the FOMC and the short run policy positions, they will continue to drive officials pronouncements if little else.
