• Federal Reserve Governor Christopher Waller says monthly CPI and PPI reports provide a reliable early estimate of the Fed's preferred inflation gauge, PCE.
  • The July PCE report showed inflation still running well above the Fed's 2% target, with headline at 3.7% and core at 3.3%.
  • Markets now look to the August CPI and PPI releases due next week for clues on the Fed's next policy move.

A Data-Dependent Fed

Federal Reserve Governor Christopher Waller offered a glimpse into the central bank's playbook on Thursday, noting that with the latest consumer and producer price reports in hand, policymakers have a "pretty accurate view" of what the upcoming PCE inflation data will show. Speaking at an event in Washington, Waller's comments underscore the Fed's reliance on a trio of inflation readings to guide its decisions, even as price pressures remain stubbornly above target.

Waller's remark points to the practice of "nowcasting"—using the more timely CPI and PPI reports to estimate the personal consumption expenditures (PCE) index, which is the Fed's formal inflation target. The Bureau of Economic Analysis typically releases PCE data about two weeks after the Labor Department's CPI and PPI figures, leaving a gap that officials and economists fill with educated guesses.

"Once we see CPI and PPI, we have a good sense of where PCE is heading," Waller said, according to prepared remarks. He stopped short of signaling any specific policy action, emphasizing that the Fed remains data-dependent.

Inflation Still Running Hot

The latest official PCE data, for July, showed headline inflation at 3.7% year over year, with core PCE—excluding food and energy—at 3.3%. Both rose 0.2% from the prior month, leaving inflation well above the Fed's 2% objective. Consumer spending was muted, with real PCE essentially flat in July, even as incomes rose modestly.

Thursday's producer price index report provided a mixed picture: overall final-demand prices were unchanged on the month but up 4.7% from a year earlier. Goods prices fell 0.7%, driven by lower energy costs, while services prices rose 0.2%, with notable increases in health care and retail-related services.

The composition of the PPI matters because several service categories feed directly into the PCE calculation, which uses a broader set of source data than CPI alone. This is why Waller's confidence in predicting PCE is notable—it signals that the Fed has enough information to gauge the inflation trend without waiting for the official release.

What's at Stake

For households, persistently high inflation continues to erode purchasing power, especially for those spending heavily on necessities. For businesses, elevated input costs pressure margins unless they can pass them along to consumers. The July PPI data showed some relief on the energy front, but service-sector price increases remain a concern.

Financial markets are now parsing every data point for clues on the Fed's next move. The August PPI is due out September 10, followed by CPI on September 11, with the official PCE release scheduled for September 30. Stronger-than-expected inflation readings could prompt investors to price out near-term rate cuts, while weaker data would likely have the opposite effect.

Waller's comments also carry global implications. U.S. rate expectations influence borrowing costs worldwide, capital flows, and the value of the dollar. A more restrictive Fed stance tends to support the greenback and tighten global financial conditions.

The Political Tightrope

The Fed's dual mandate—maximum employment and stable prices—puts it in the crosshairs of political debate. Consumer advocates and some elected officials emphasize the cost-of-living burden and call for quicker relief, while inflation hawks warn against easing prematurely. Trade policy, tariffs, and geopolitical disruptions add further complexity to the inflation outlook.

"The key question is whether we're seeing broad-based progress toward 2%," Waller said. "We need to see sustained, convincing evidence before adjusting policy."

Looking Ahead

Short-term focus will be on the details within the upcoming CPI and PPI reports, particularly core services, health care, and housing-related costs. Analysts will also watch whether lower energy prices are offset by broader pressures.

If the next wave of data suggests PCE is moving steadily toward target, the case for rate cuts strengthens. If not, Waller's framing suggests the Fed could maintain its restrictive stance for longer.

As of now, futures markets are pricing in a roughly 40% chance of a quarter-point cut at the Fed's next meeting in late September, according to CME Group data. But with Waller and other officials emphasizing data dependence, those odds could shift quickly—depending on what the next CPI and PPI reports reveal.