The latest economic report expected from the Commerce Department has sparked hopes for positive news regarding inflation. The personal consumption expenditures price index, closely monitored by the Federal Reserve, is anticipated to show minimal, if any, monthly increase for the month of May. This would mark the first time since November 2023 that such a trend has been observed. More significantly, the core PCE price index, which excludes volatile food and energy prices and is of particular interest to Fed policymakers, is projected to reveal its lowest annual reading since March 2021. It was in March 2021 that the core PCE first surpassed the Fed’s desired 2% inflation target. Despite multiple interest rate hikes implemented by the central bank since then, the pace of price hikes has remained beyond their target range.
According to official Dow Jones forecasts, the headline PCE price index is expected to remain unchanged on a monthly basis, while the core PCE price index is forecasted to increase by 0.1%. These numbers are in comparison to the previous month’s increases of 0.3% and 0.2% for headline and core PCE, respectively. On a year-over-year basis, both headline and core PCE are anticipated to stand at 2.6%. If the forecasts hold true, it would mark an important milestone. The chief economist of U.S. Bank, Beth Ann Bovino, stated, “We are in line with [the forecast] that the PCE core pricing data will come in soft. That’s good news for the Fed. It’s also good for people’s pocketbooks, although I don’t know if people feel it just yet.”
Despite the apparent decline in the rate of inflation from its peak in mid-2022, prices have continued to rise steadily. Since March 2021, core PCE has increased by 14%, reflecting a significant upward trend. This ongoing increase in prices has led Fed officials to exercise caution in declaring victory over inflation. Fed Governor Lisa Cook emphasized, “Returning inflation sustainably to our 2% target is an ongoing process and not a fait accompli.” The Fed’s stance on the timing and pace of rate cuts remains cautious, with many officials agreeing that easing measures are likely to be implemented later this year, contingent upon the consistency of economic data.
Market futures are currently pricing in a high probability of the Fed implementing its first quarter-percentage-point cut in September, followed by another cut by the end of the year. While policymakers initially projected only one cut at their recent meeting, the evolving economic landscape may prompt further adjustments. Beth Ann Bovino remarked, “We do expect softening in the real economy – not falling off a cliff, just softening – that suggests that inflation will be softer as well later on. That gives us reason to expect the Fed will likely have their first cut in September.” The uncertainties surrounding future rate cuts highlight the Fed’s reliance on incoming data to guide their decisions.
Apart from inflation figures, the Commerce Department is set to release data on personal income and consumer spending. Estimates suggest a rise of 0.4% in personal income and 0.3% in consumer spending. These indicators will provide further insights into the intricacies of the current economic landscape and contribute to the ongoing discussion around inflation and monetary policy. The interplay of various economic factors underscores the complex nature of managing inflation and ensuring stable economic growth in the long run.
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