This Week’s PCE Looks Set to Roll Over

• The Cleveland Fed anticipates 0.1% monthly PCE growth for November.

• That would produce an annualized rate of 2.6%.

• Such an outcome would imply a real rate of 1%.

Inflation’s next plot twist lands this week, and the stakes are rising…

The end of this week brings the next key update on inflation. The U.S. Bureau of Economic Analysis (“BEA”) will release its October and November personal consumption expenditures (“PCE”) data. It’s publishing two months at once because of last fall’s government shutdown. The latest numbers will likely show prices holding steady across major categories, putting downward pressure on the annualized pace of growth.

These numbers matter because the Fed relies on PCE when setting monetary policy. It views PCE as a more complete gauge of inflation since it captures total spending on goods and services consumed by households, including items purchased on their behalf—like health insurance. By contrast, the U.S. Bureau of Labor Statistics’ (“BLS”) consumer price index (“CPI”) focuses on out‑of‑pocket spending by urban consumers.

Because PCE spreads its weights across more categories, it’s less concentrated—and less volatile—than CPI. That stability reinforces the Fed’s preference. And according to the Cleveland Fed, its economic staff expects the annual pace of growth to keep drifting lower as new data comes in…

Since the last report in September, growth in services and manufacturing prices has eased, based on regional Federal Reserve bank business surveys. This trend should influence PCE more than CPI. If the Cleveland Fed’s forecast is right, it strengthens the case for easier monetary policy later this year. That shift would support a steady, long‑term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

In late December, BLS released its consumer and producer price index data for December. It wasn’t until last week that it published the Producer Price Index (“PPI”). Several readings inside those reports offer clues about PCE. Food and accommodation prices contracted, shelter, recreation, and transportation held steady, and energy, medical expenses, and financial services rose.

Housing and medical expenses each make up about 17% of the PCE index. Most other categories carry weights between 3% and 8%. After comparing the BLS inputs with PCE’s relative weights, the numbers point to a slight deceleration in November compared to September.

The Cleveland Fed’s Inflation Nowcast backs this up. Its staff updates the outlook continuously, and the latest forecast shows November PCE growth at 0.1%—about 0.2 percentage points lower than in September.

Now, let’s examine what that means for the annualized growth rate…

The table shows the monthly pace of PCE growth over the past year. To estimate the annualized rate ahead of this week’s release, I replaced last November’s 0.1% reading with the Cleveland Fed’s current forecast. Adding up the monthly totals brings the annual rate down to 2.6% from 2.8% in September.

Subtracting November’s 2.6% PCE forecast from the effective federal funds rate of 3.6% implies about 100 basis points of potential rate cuts. And if we factor in the historical real rate average of ‑0.2% since 2000, the Fed has an extra 20‑basis‑point cushion…

Recent commentary from policymakers suggests they want more time for last year’s rate cuts to work through the economy. They remain concerned that inflation is still too high and want to see it move closer to the 2% target before acting again.

If November’s PCE confirms the Cleveland Fed’s 0.1% estimate, that should signal price growth is starting to ease once more. The shift will strengthen the case for rate normalization later this year. With inflation easing and the labor market softening, the Fed has room to keep cutting. That backdrop should support steady upside in risk assets like stocks.

Five Stories Moving the Market:

U.S. Treasury Secretary Scott Bessent said he had spoken with his Japanese counterpart amid a selloff in Japan’s government bonds that he said had fed through to affect the Treasuries market; Bessent said he expects the Japanese government to take efforts to calm investor concerns – Bloomberg. (Why you should care – Bessent has repeatedly called on Japan to take a more active role in stabilizing its currency and yields)

Japan’s Democratic Party for the People chief, Yuichiro Tamaki, called on the government to act decisively against excessive bond market moves; Tamaki suggested buying back government bonds or reducing issuance of super-long notes – Reuters. (Why you should care – the similar makeup of the DPFP’s voter base could force the ruling Liberal Democratic Party to act sooner than later)

Treasury Secretary Scott Bessent said he expects to go ahead with the U.S.’s trade deal with the European Union, despite some EU lawmakers saying they might hold up the agreement over President Trump’s comments over Greenland – WSJ. (Why you should care – Bessent suggested cooler heads will prevail in the Greenland dialogue, signaling the U.S. isn’t looking to ratchet up tariff tensions)

Nvidia Chief Executive Officer Jensen Huang is planning to travel to China in late January as he works to reopen a crucial market for his company’s artificial intelligence chips; Huang will be in the country to visit Beijing and attend company parties ahead of the Lunar New Year holidays – Bloomberg. (Why you should care – reopening China would boost Nvidia’s revenue backlog and outlook)

Australia's Lynas Rare Earths reported a 43% rise in second-quarter revenue, as higher selling prices cushioned a production shortfall caused by power disruptions at its Western Australia processing facility – Reuters. (Why you should care – global efforts to reduce dependence on China for rare earths should help to boost prices and sales for other established production and refining companies)

Economic Calendar:

Earnings: ALLY, CFG, DAN, FULT, HAL, JNJ, SCHW, SNV, TRV

World Economic Forum in Switzerland

U.K. – CPI, PPI for December (2:00 a.m.)

ECB’s Lagarde (President) Speaks (2:30 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – President Trump Speaks (8:30 a.m.)

BOE’s Woods (Deputy Governor) Speaks (9:15 a.m.)

U.S. – Pending home sales for December (10:00 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

ECB’s Lagarde (President) Speaks (11:45 a.m.)

Treasury Auctions $13 Billion in 20-Year Bonds (1 p.m.)

ECB’s Nagel (Germany) Speaks (1:30 p.m.)