Sticky Inflation Report Raises Jackson Hole Stakes for Fed’s Warsh

On the menu at the Jackson Hole Economic Policy Symposium’s annual Friday night barbecue? Sticky maple-glazed burnt ends and even stickier inflation. 

The latest personal consumption expenditures (PCE) data from the US Bureau of Economic Analysis on Wednesday showed inflation climbed 3.7% year over year in July. That’s above expectations and enough to place renewed pressure on Federal Reserve Chairman Kevin Warsh to address inflation head-on in his speech on Friday. With the dream of the (presumptively dovish) chairman delivering a rate cut this year dying, some experts are starting to wonder whether the Fed’s long-held 2% inflation target should be thrown in the casket along with it.

Moving Target

It’s been five long years of an inflation rate above 2%, and its culprits are as familiar as they are rotating. Services claim much of the blame this time around, rising 0.3% from June to July. Energy and gasoline prices fell in the same period, but with a summer ceasefire now over, gas prices look primed to rise again. And did we mention the recent return of tariffs on Canadian goods? 

The good news is that the data also showed that personal income increased 0.4% on the month, outpacing overall inflation of 0.2% in the same period. Step back and macro trends become clear: The AI buildout will continue for the foreseeable future. Housing costs, though cooled slightly from a peak a couple of years ago, remain above pre-pandemic norms (and the data center builders are outbidding home builders for land, labor and capital). An aging population will continue to stress healthcare services, and deglobalization is limiting access to the cheap goods of yore. It’s why the 2% target now looks out of reach:

• “[The Fed] still has considerable ground to cover before markets see 2% inflation as a credible outcome rather than a distant aspiration,” Olu Sonola, head of US economics at Fitch Ratings, told Reuters on Tuesday.
• “We’re not going to be anywhere close to 2% inflation by the end of this year, and probably not until sometime in 2028,” Conference Board Chief Economist Dana M. Peterson recently told Fox Business.

Methodology, Man: The Fed has one factor on its side: The Bureau of Economic Analysis is set to change its methodology for calculating PCE before the next data dump in September, which most analysts say could shrink the final number by about 0.2%. One major change will see the end to a calculation in which a booming stock market can get misrepresented as inflated financial services costs, due to fatter (but flat, percentage-wise) fees for advisors. So the revision is less about moving the goalposts and more about changing what counts as a goal.