The Fed's preferred inflation gauge — the Personal Consumption Expenditure (PCE) index — is due out this Thursday along with a slew of other key inflation data throughout the week. EY Chief Economist Gregory Daco sits down in-studio with Yahoo Finance Live to discuss how inflation readings are lining up with the Federal Reserve's 2% goal.

"I think the January data was extremely noisy, it wasn't just inflation... we know there was a bit of a January reset effect. we also know there was some seasonality in there, and we know that some of the data was affected by some of the weather patterns," Daco explains. "I would take a lot of the January data and really put it aside, whether it's the jobs report that was very strong or the retail sales that were very weak and home sales activity also on the softer side. weather was a big factor."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- 2% GDP growth and cooling inflation, that is according to a new survey by the National Association of Business Economics who say 2024 will be a bumper year for the economy. That theory will, of course, be put to the test this week with the latest PCE data out Thursday as well as a slew of other economic data. And joining us now is Greg Daco, chief economist at EY, to give us his very latest. Greg, great to see you.

GREGORY DACO: Great to see you too.

- Maybe we'll start there, Greg. Just, you know, listen, we said the soft landing camp. That seems to be consensus. Is that where you are at for 2024?

GREGORY DACO: That's, I think, where we are. I think we are in a situation where we've seen the economy cool a little bit but not dramatically so. But importantly, that cooldown has brought inflation lower. So the rebound on the supply side and easing inflation, easing consumer demand has brought inflation a little bit closer to the fed's 2% target.

That's really what we're after. After all, we're not aiming for a recession. We're aiming-- or the fed is aiming for an environment where inflation is closer to that 2% target. And we're on a sustainable economic trajectory.

- So you say inflation is coming back down to target. So you don't seem concerned about that CPI print that we recently got that set everybody sort of aflutter ahead of PCE this week. Was that CPI report head fake? Was it sort of a misreading of the data? What do you think?

GREGORY DACO: I think the January data was extremely noisy. It wasn't just inflation. Inflation was hotter than expected, both CPI and PPI. But we know that there was a bit of a January reset effect. We also know there was some seasonality in there. And we also know that some of the data was affected by some of the weather patterns.

So I would take a lot of the January data and really put it aside, whether it's the jobs report that was very strong or the retail sales that were very weak and home sales activity also on the softer side. Weather was a big factor. And some of the January data is quite noisy.

So I would put-- take a step back from that data. We are still in an environment where we're seeing inflation move towards the fed's target. The numbers on the PCE front later this week will indicate that, yes, on a month-to-month basis, there is a little bit more of that stickiness.

But on a year-over-year basis, which is what the fed is paying attention to, we are seeing that movement towards the 2% target. So we're still moving in the right direction. The fed will be a little bit more cautious than we are because it has to balance that risk of inflation rebounding. And they don't want to essentially lose that battle against inflation.

- So, Greg-- so we're moving in the right direction, you say. So what is the trajectory of inflation look like to you over 2024? Because some-- Greg, some of your colleagues, other economists said, you know, getting back to 2%, they argue, and staying there. They used to argue might be kind of tougher than some people expect. But what do you think?

GREGORY DACO: I don't think the last mile is the most difficult. There's nothing to prove that the last mile getting from 3% to 2% inflation is the most difficult. We are in an environment where you still have disinflation in the pipeline on the housing front. You have an environment where consumers are pushing back against higher prices, higher costs. That's disinflationary.

We have an environment where productivity is very strong in the US. That's the outperformance that we're seeing in the US relative to its peers. That's also disinflationary. Wage growth is coming down. Wage growth compression is very much part of the story when we talk to a lot of our clients.

So overall, if you look at all the dynamics that are happening in the US economy, they're all pointing towards a disinflationary environment. I think by the end of the year, we'll be very close to that 2% target.