Quietly, the Federal Reserve has given more attention to this "new" inflation indicator

Including Federal Reserve Chairman Jerome Powell, senior officials at the Federal Reserve are increasingly focusing on a relatively obscure price indicator—market-based inflation—as a reason to maintain confidence in the U.S. inflation outlook.

The market-based inflation indicator excludes a range of service sector data, which cannot be directly measured by data collectors and must be estimated. Specifically, the market-based version of the Personal Consumption Expenditures Price Index excludes several items that government statisticians must estimate or infer because they cannot observe the actual prices consumers pay for these services:

Among them, portfolio management and investment advice are significant items not included, which primarily track U.S. stocks, meaning that the recent rise in U.S. stocks over the past few months is considered to have pushed up inflation under the PCE inflation category.

Additionally, several types of insurance are also excluded. For example, a category intended to reflect the costs of motor vehicle and other transportation insurance rose 6.5% year-on-year in November, partly reflecting catch-up inflation following the surge in car prices in 2021 and early 2022.

The U.S. inflation situation reflected by the market-based inflation indicator in recent months does not align with the trends shown by other important inflation data. For instance, the Fed's preferred inflation indicator accelerated to 2.8% in November, while the market-based inflation indicator has remained around 2.4% since May of last year.

Due to the stickiness of U.S. inflation, current investor expectations for the Fed to cut interest rates in 2025 have become pessimistic, and U.S. Treasury yields continue to rise. After the release of unexpectedly strong ISM Services PMI and JOLTS job openings data this week, traders are no longer fully betting on the Fed cutting rates before July.

Analysis suggests that the distinction between the market-based inflation indicator and more commonly used inflation indicators like core PCE is worth noting. Although Fed officials have indicated that they need to see more progress toward the 2% inflation target before lowering rates again, officials have recently mentioned alternative inflation indicators that are closer to the Fed's 2% inflation target, which may suggest that the threshold for further rate cuts is actually lower.

This week, Fed voting member and Governor Christopher Waller predicted that inflation would continue to cool, elaborating on the reasons for focusing on the market-based inflation indicator in his speech and expressing support for further rate cuts this year:

Inflation in 2024 is largely driven by rising estimated prices, such as housing services and non-market services, which are estimated rather than directly observed, and I believe they are less reliable in guiding the supply and demand balance of all goods and services in the economy.

Powell also mentioned "non-market services" as a factor contributing to the recent rise in inflation during a press conference on December 18. Fed Governor Adriana Kugler made similar statements in a CNBC interview on January 3. The minutes from the Fed's December meeting released this Wednesday showed that many policymakers agreed with Waller's views. Bloomberg's Chief U.S. Economist Anna Wong stated that the reason for abandoning inference-type projects is that they do not actually provide forward-looking predictive signals to indicate the direction of inflation. Regarding the aforementioned insurance cost-related inflation, Wong pointed out that from a personal perspective, this inflation is real, but from the Federal Reserve's perspective, they will study it carefully.

Yesterday's report stated that Trump's advisors are considering how to reshape the leadership of the Federal Reserve. Trump's advisors have also begun drafting a list of potential successors to Federal Reserve Chairman Jerome Powell, who will take over in May 2026, focusing primarily on the current Federal Reserve officials' comments on interest rates to adjust the candidate list