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One piece of data I will be watching closely is the scheduled revisions […]. Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains. In mid-February, we will get the January CPI report and revisions for 2023, potentially changing the picture on inflation. My hope is that the revisions confirm the progress we have seen, but good policy is based on data and not hope. – Fed Governor Waller “Almost as Good as it Gets…But Will It Last?”, January 16, 2024
Inflation declined much more quickly than expected in 2023. The Fed’s preferred inflation measure, core PCE, appears to be running at close to the 2% target in the second half of last year. This catalyzed the shift in monetary policy messaging in December 2023, and markets have subsequently gone on to price more than five interest rate cuts for 2024. However, as we analyze the totality of the US inflation and growth data entering 2024, we share the caution voiced by Fed Governor Waller in his recent speech.
As the saying goes, you only get one chance to make a first impression. However, that adage doesn't apply as much to inflation data. Short-term measures of inflation are very noisy and PCE is particularly subject to change. Given the heightened importance of the inflation trajectory for bond markets following three years of above-target price increases, we note two important features of the data:
Revisions are one source of noise in short-term inflation measures. Revisions occur throughout the year as statistical agencies incorporate additional data sources – like tax filings – into their preliminary estimates of national activity. The plot below shows revisions to core PCE inflation, highlighting both the frequency and magnitude of revisions.
Notably, upward revisions have been more frequent and sizable in the post-pandemic reopening period. We find that revisions to quarterly core PCE since the Q1 2021 reopening have averaged +36bps and multiple quarters have had upward revisions of over 1%. The near-term trajectory of inflation can look very different in the aftermath of many of these revisions. As noted by Waller, nascent downward trends can disappear altogether with the incorporation of additional information.
Core PCE is a moving target
Source: BlackRock, with data from Philly Fed as of December 2023. Lines show core PCE at different release dates, inclusive of revisions.
Our analysis of historical core PCE revisions also reveals a few interesting dynamics about the nature of revisions, which further contribute to our view that upward revisions are likely:
To complement our analysis of traditional data, our team computes our own alternative inflation measures to help to reduce the noise and idiosyncrasies contained in any single measure of price changes. Examples include down-weighting or excluding any sub-component within the overall price index that exhibits excessive volatility, not just food and energy as is the norm with standard core inflation measures. This can be especially helpful for moments like this when the two main measures of core inflation – PCE and CPI – diverge. In the plot below, we show the annualized quarterly run rates of all three of these inflation measures. This visual shows that the moderation of PCE is anomalous relative to other two measures that have continued to track above 3% in recent quarters.
Core PCE has diverged from other measures of inflation
Source: BlackRock, with data from Bureau of Economic Analysis and Bureau of Labor Statistics as of January 2024. * Average across BlackRock GTAA team’s alternative inflation indicator weightings.
Finally, more tactically and separate from the question of revisions, we believe geopolitical fragmentation and the recent shipping disruptions in the Red Sea and Panama Canal could reverse some of the goods price declines that powered the disinflation in 2023. Taking all of this together, we share Governor Waller’s concern of “will it last?” as it pertains to the recent trajectory of PCE inflation.
In our tactical liquid alternative portfolios like the BlackRock Tactical Opportunities Fund, we seek to deliver returns that are lowly correlated with stock and bond markets. We use macro data related to growth, inflation, policy and market pricing to seek out long and short investment opportunities across countries and asset classes.
Our insights on inflation and core PCE revisions help to inform our directional underweight positioning in global duration. They also contribute to our recent rotation within the portfolio to be shorter US Treasuries versus non-US government bonds, as market pricing appears misaligned with the otherwise resilient activity data in the United States.
1 Luciani & Trezzi (2019) from the Federal Research estimate the initial release bias in Comparing Two Measures of Core Inflation: PCE Excluding Food & Energy vs. the Trimmed Mean PCE Index, noting “this evidence suggests that the first release of the index excluding food and energy should be interpreted with care.” Croushore (2019) also documents the numerous sources of the bias in Revisions to PCE Inflation Measures: Implications for Monetary Policy and notes “the Taylor rule would have been higher by an average of 0.32 percentage points if the Fed had forecasted revisions to the PCE inflation rate.”
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Uncover expert insights from BlackRock’s strategists and portfolio managers. Get the latest on the global economy, geopolitics, retirement and other timely investment ideas.