New York Fed Inflation Gauge Outpaces Headline PCE, Hinting at Stubborn Price Pressures

After inflation spiked following the COVID-19 pandemic, the Federal Reserve Bank of New York developed a unique metric to gauge underlying price trends. This alternative measure, known as the multivariate core trend of PCE (Personal Consumption Expenditures) price inflation, was introduced to offer a clearer picture of long-term inflation pressures than traditional inflation indicators. At the time, this measure indicated that inflation might be stabilizing more quickly than what was being reported by conventional statistics.

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The key difference between this gauge and more common measures lies in how it filters short-term price shocks. Unlike the core PCE index—which strips out food and energy prices—the multivariate core trend seeks to capture the more enduring components of inflation.

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It does this by isolating persistent inflation patterns and excluding one-time or temporary influences, giving economists a more nuanced view of what might lie ahead for price stability.

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However, the story this metric tells has now shifted. According to the latest data, the multivariate core trend inflation rose to 3% year-over-year in March, up from 2.9% in February. This upward move indicates growing inflationary pressure, and notably, it is higher than both the headline PCE inflation rate, which stood at 2.3%, and the core PCE index, which registered 2.6%.

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This acceleration suggests that inflation may be stickier than many hoped. The New York Fed attributed the rise in the measure primarily to persistent inflation in the services sector, excluding housing, along with broad-based inflation in goods. These categories have been particularly influential in driving the underlying trend higher.

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The implications of this data are significant, especially for monetary policy. While the Federal Reserve has been closely watching various indicators to determine when it might be appropriate to reduce interest rates, this latest uptick in inflation persistence complicates the picture. It signals that even though some official measures show progress toward the Fed’s 2% inflation target, underlying pressures may still be too high for comfort.

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This sentiment is reflected in the market’s expectations ahead of the upcoming Federal Reserve policy meeting. According to the CME FedWatch tool, traders are virtually certain that no interest rate cut will be announced at Wednesday’s meeting. However, expectations remain for a possible rate cut in July, assuming economic data supports such a move by then.

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Meanwhile, in the bond market, the yield on the 2-year U.S. Treasury note—which is highly sensitive to Fed policy—was last seen at 3.83%, having declined by 42 basis points so far this year. This drop in yield indicates that, despite the recent rise in persistent inflation, investors still believe rate cuts are likely in the months ahead, possibly due to broader signs of economic slowing or expectations of eventual inflation moderation.

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Still, the message from the New York Fed’s multivariate model is a cautious one. It suggests that inflation’s decline might not be as steady or predictable as headline numbers suggest. While food and energy prices can fluctuate wildly and create short-term volatility in inflation figures, the broader and more persistent trends captured by the Fed’s model reflect more ingrained pricing dynamics that could take longer to unwind.

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Economists and policymakers will be watching this trend closely in the coming months, as it could shape the timing and pace of any future rate adjustments. The Fed has repeatedly stated it wants to see clear and sustained progress toward its inflation goal before easing monetary policy. If the multivariate core trend continues to rise—or even just remains elevated around the current 3% mark—it could delay rate cuts and keep borrowing costs higher for longer than currently expected.

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In summary, while some inflation indicators suggest progress toward normalization, the New York Fed’s multivariate core trend measure is flashing a warning. It’s highlighting that persistent price pressures—especially in services and goods outside housing—remain a challenge. This could influence Federal Reserve decisions in the coming months and serves as a reminder that the road to low inflation may still be uneven.

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