Fed Forecasts Declining Headline Inflation, Rising Core PCE Amid Iran Conflict

The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects that headline inflation will decline for the third consecutive month in August, reaching 3.22%. However, this modest decrease may be overshadowed by a more disturbing trend: Core Personal Consumption Expenditures (PCE), which excludes food and energy costs, is expected to reaccelerate to 3.36% in August.

This development has raised concerns about the entrenchment of Iran-war-driven inflation, which has already had a significant impact on the broader economy. The price stickiness of Core PCE suggests that the effects of this conflict are not limited to energy supply disruptions but are also affecting consumers' pocketbooks.

The Federal Reserve's preferred measure of inflation, Core PCE, has historically been a key indicator for the FOMC when making monetary policy decisions. If interest rates are raised in response to the projected increase in Core PCE, it could slow or stall the growth of partially debt-financed artificial intelligence data centers that have driven stock market gains.