PREVIEW - US PCE INFLATION (13:30BST/08:30EDT)

Analysts expect the PCE headline to rise by 0.4% M/M (prev. 0.2%), and the annual rate is seen ticking up to 3.8% Y/Y (prev. 3.7%); core PCE is expected to rise by 0.3% M/M (prev. 0.2%), with the annual rate of core PCE seen rising to 3.4% Y/Y (prev. 3.3%). In the month, headline CPI picked-up in pace to 0.4% M/M (from 0.1%), though the annual rate was unchanged at 3.4% Y/Y; the core gauge rose by 0.3% M/M, above the expected and previous 0.2%, though the annual rate of core CPI slipped to 2.4% Y/Y from 2.5%. Headline PPI also picked-up, printing 0.4% M/M (from 0.1%), in line with expectations, while the annual rate rose to 5.4% Y/Y (from 4.8%, and above the expected 5.3%); core PPI rose 0.2% M/M, below the expected and previous 0.3%, though the annual rate of core PPI climbed to 4.6% Y/Y from 4.3%, in line with expectations. At its policy meeting in September, Fed officials nudged up their headline PCE view for this year to 3.7% (from 3.6%), while core is seen at 3.4% Y/Y (revised up from 3.3%); both headline and core PCE are seen easing next year to 2.3% Y/Y and 2.5% Y/Y respectively. Fed officials broadly agree that inflation is too high, and have noted that it has been above target for more than five years. At his post-meeting press conference in September, where the Fed unanimously voted to hike by 25bps, Chair Warsh said summer readings showed no meaningful improvement in underlying trends, estimating August PCE at around 3.6% Y/Y and core at 3.2% Y/Y. Schmid and Barkin described price pressures as broad-based rather than confined to energy. Goolsbee and Musalem see a growing demand-driven element, and Paulson and Williams cite AI-related demand. Goolsbee and Hammack warned that supply shocks are proving persistent, and several officials see risks for prices as tilted to the upside. Another factor to note, the Bureau of Economic Analysis will release updated PCE deflator methodology, applied retroactively through Q1 2021. RBC estimates that core PCE’s annual pace is expected to fall 18bps, which would revise July’s reading to 3.1% from 3.3%. RBC analysts note that three changes drive this: portfolio management services will use a CES-based quantity series instead of nominal price deflation; computer software will use a new composite PPI/CPI deflator; and legal services will use a new deflator after the current CPI measure proved unreliable.