The Federal Reserve shifts to "market-based" inflation indicators, adding optimistic grounds for the economic outlook

According to Zhitong Finance APP, including Chairman Jerome Powell, senior officials of the Federal Reserve are increasingly relying on a lesser-known price indicator—"market-based" inflation—as the basis for their optimistic economic outlook. This indicator excludes certain service prices that can only be estimated due to the difficulty of direct measurement, resulting in a different trend from the central bank's preferred core inflation measure in recent months. Although the core inflation measure accelerated to 2.8% in November, the market-based inflation indicator has remained stable at around 2.4% since May. This distinction is particularly important against the backdrop of investor disappointment over the Federal Reserve's potential interest rate cuts in 2025 and rising U.S. Treasury yields. Federal Reserve Governor Christopher Waller articulated the reasons for focusing on this alternative indicator in a speech on Wednesday and expressed support for further interest rate cuts this year. He pointed out that inflation in 2024 is primarily driven by rising estimated prices, such as housing services and non-market services, which have lower reliability because they are derived from estimates rather than direct observation. The latest minutes from the Federal Reserve's meeting also show that several policymakers agree with Waller's viewpoint. The market-based personal consumption expenditures price index excludes multiple items that government statisticians must estimate, such as portfolio management and investment advisory services, insurance, etc., because the actual prices of these services are difficult to observe. Additionally, categories such as gambling, free financial services, life insurance, medical and hospitalization services, net motor vehicle and other transportation insurance, and net outbound travel are also excluded. Powell and other Federal Reserve officials, including Adriana Kugler, have acknowledged that these "non-market services" are a factor in the recent rise in inflation. However, Anna Wong, Chief U.S. Economist at Bloomberg Economics, stated that estimated prices do not provide forward-looking predictive signals, and therefore the Federal Reserve may overlook these price changes. For example, in the 12 months ending in November, the cost of motor vehicle and other transportation insurance rose by 6.5%, reflecting catch-up inflation following a surge in car prices, but from the Federal Reserve's perspective, this increase may be ignored. The Bureau of Economic Analysis will release the PCE inflation data for December on January 31, at which point the market will gain a more comprehensive understanding of the latest dynamics of this market-based inflation indicator