The upcoming release of the Personal Consumption Expenditures (PCE) price index by the Commerce Department is generating significant anticipation among economists and investors. The PCE price index, closely monitored by the Federal Reserve as a key measure of inflation, is expected to show minimal, if any, monthly growth for May. This would mark the first time since November 2023 that such stagnation has occurred. Even more crucially, the core PCE price index, which excludes volatile food and energy prices and receives heightened attention from Fed policymakers, is projected to reveal its lowest yearly reading since March 2021.
In March 2021, the core PCE price index surpassed the Fed’s 2% inflation target for the first time in the current cycle. Despite a series of aggressive interest rate hikes implemented since then, the central bank has struggled to bring inflation back within its desired range. The official forecasts for Friday’s release suggest that the headline PCE price index will remain unchanged on a monthly basis, while the core index is expected to increase slightly by 0.1%. Both indexes are projected to show a 2.6% year-over-year increase. If the forecasts for the core PCE price index materialize as expected, it would represent a significant milestone.
Leading economists, such as Beth Ann Bovino, the chief economist at U.S. Bank, acknowledge the potential positive impact of softening core PCE price data. Bovino believes that a softer inflation rate would be beneficial for both the Federal Reserve and consumers, although she notes that the effects may not be immediately felt by the general public. Despite the notable decline in the inflation rate from its peak in mid-2022, prices have continued to rise steadily. Since March 2021, the core PCE has surged by 14%, underscoring the persistent challenges faced by Fed officials in achieving their inflation target.
Fed Governor Lisa Cook emphasized the ongoing nature of the process to return inflation to the 2% target, cautioning against premature declarations of victory. While the Fed has initiated rate hikes since March 2022, policymakers remain cautious about the timing and extent of future cuts. Market indicators suggest that there is a high probability of the Fed implementing quarter-percentage-point rate cuts in September, with further reductions anticipated by the year’s end. The prospect of softer economic conditions and inflation trajectory could provide the Fed with the rationale needed to reduce rates multiple times in the coming months.
In addition to the PCE price index data, the Commerce Department is scheduled to release figures on personal income and consumer spending. Current estimates suggest a 0.4% increase in personal income and a 0.3% rise in consumer spending. These figures, when considered alongside the inflation data, will offer valuable insights into the overall health of the economy and potential future policy actions by the Federal Reserve. As investors and analysts await the release of these critical reports, the implications for financial markets and economic stability remain uncertain.
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