The Federal Reserve shifts to "market-based" inflation indicators, adding optimistic basis for economic outlook.

Including Chairman Jerome Powell, senior officials at the Federal Reserve are increasingly relying on a less-publicized price index - "market-based" inflation, as the basis for their optimistic economic outlook. This index excludes some service prices that are difficult to directly measure and can only be estimated, thus showing a different trend from the central bank's preferred core inflation index in recent months. Although the core inflation index accelerated to 2.8% in November, the market-based inflation index has been stable at around 2.4% since May. This difference is particularly important against the backdrop of investor disappointment in the possibility of a rate cut by the Federal Reserve in 2025 and the rise in US Treasury yields. Federal Reserve Governor Christopher Waller outlined the reasons for focusing on this alternative index in his speech on Wednesday and expressed support for further rate cuts this year. He pointed out that inflation in 2024 was mainly driven by estimated price increases, such as housing services and non-market services, whose reliability is low because they are based on estimates rather than direct observations. The latest minutes from the Fed's meeting also show that several policymakers agree with Waller's views. The market-based Personal Consumption Expenditures Price Index excludes several items that government statisticians must estimate, such as investment management and advisory services, insurance, etc., because the actual prices of these services are difficult to observe. In addition, categories such as gambling, gratuitous financial services, life insurance, medical and hospital services, net motor vehicles and other transport insurance, as well as net foreign travel, are also excluded. Powell and other Fed officials such as Adriene Kugler have acknowledged that these "non-market services" are a factor in the recent increase in inflation. However, Bloomberg's chief economist for economic research, Anna Wong, stated that estimated prices do not provide forward-looking predictive signals, so the Fed may overlook these price changes. For example, in the 12 months leading up to November, the cost of motor vehicle and other transport insurance rose by 6.5%, reflecting catch-up inflation after a surge in car prices, but from the Fed's perspective, this increase may be overlooked. The Bureau of Economic Analysis will release the December PCE inflation data on January 31, which will provide a more comprehensive understanding of the latest dynamics of this market-based inflation index.