Commerzbank warns Fed credibility risks grow if PCE index is abandoned amid high energy costs and framework review.
Persistent high oil and energy prices are complicating the Federal Reserve’s inflation strategy, increasing the likelihood of further policy tightening. Core inflation metrics, which exclude energy, may not fully capture second-round effects from sustained price pressures.
The PCE price index, the Fed’s preferred inflation gauge, remains above 3% year-over-year, with projections suggesting it may not dip below that threshold until late 2024. Analysts question whether the Fed will maintain the PCE as its primary target as Kevin Warsh’s review of the inflation framework progresses.
Uncertainty over the Fed’s approach could erode confidence in the US Dollar, particularly if flexible inflation definitions are adopted. Markets have only modestly priced in additional rate hikes despite ongoing price pressures.