Inflation Is Really Sticky. What the Fed's Preferred Gauge Could Show.

The Federal Reserve's preferred measure of inflation likely cooled a little in February. This would indicate a slight slowdown in the price growth compared to recent months, but still remain far higher than what the central bank wants.

Consensus expectations indicate that economists expect the core PCE price index, also known as core PCE deflator, to have risen 0.4% in the last month. This would bring the annual rate up to 4.7%. This would be a slight drop from the 0.6% pace in January, but the pace for the year would remain unchanged.

It is expected that the overall PCE deflator (which includes volatile energy and food prices which are not included in the core measure) will have slowed down to 0.3% from 0.6% earlier. This would reduce the PCE's annual rate to 5.1%, from 5.4%.

It would be a good sign if inflation slowed down. This would indicate that the Federal Reserve’s aggressive efforts to tighten the monetary policy in the last year have had at least a minor impact.

Quincy Krosby is the chief global strategist at LPL Financial. He says that a lower inflation reading could calm down Treasury markets' fears of an imminent recession while giving equity market a reason to celebrate.

The Fed would be less than satisfied with a slowdown that is in line to expectations. It still wants the core PCE to be cut by more than 50% to meet its 2% target. Recent data suggest that the PCE's annual rate of core price growth is not accelerating. However, the trend has been more or less sideways since the end of November when the PCE stood at 4.8%, just a tick higher than the forecast for the month.

The Fed raised the federal funds rate earlier this month despite the ongoing turmoil in the banking sector and its emergency response. This spooked the investors and was expected to slow down the economy.

Fed officials are alert to the potential impact of the banking crisis on credit conditions, and how that might affect inflation. However, it is unclear exactly what this could be. Despite the hot economic data, the central bank backed off from the widely anticipated half-point hike in rates earlier this month. This was largely due to the uncertainty brought on by the banking crisis. Instead, the Fed increased rates by a quarter-point.

There are some signs that inflation expectations may have dropped from recent highs. However, this is not enough to allow the Fed claim victory.

The PCE is different from the Consumer-Price Index, another inflation measure closely monitored, in that it gives weight to various categories. CPI, on the other hand, gives shelter a much higher weight than PCE, which is why CPI has increased in recent months, as housing costs and rent have skyrocketed.

In the next few months, economists expect that housing costs will fall in both measures of inflation. This is to reflect real-time data from private sources which show price reductions have already taken place. The Fed has shifted its focus to core prices, excluding housing costs, because they have been increasing in recent months. The PCE data will rely heavily on the'super-core category' to determine where prices are headed.

The PCE will be released on Friday, at 8:30 am.