At the same time, Core Personal Consumption Expenditures (PCE) inflation is expected to tick up in May – coming in at 2.6% compared to April’s 2.5%. This uptick comes as the U.S. Bureau of Economic Analysis prepares to release the latest PCE Price Index data on Friday at 12:30 GMT. Analysts argue that this is the most substantive of big monthly core PCE figures. Second, it is unbiased by base effects, which gives us a better look at true inflation trends.
Furthermore, headline annual PCE inflation is expected to spring back up to 2.3%, from 2.1% last month. This data provides useful context for understanding the overall direction of consumer prices. These findings would have a powerful impact on the Federal Reserve’s monetary policy—particularly with regard to interest rate setting. The markets are highly anticipating all of this. Attention is focusing on the numbers’ likely impact on expectations for future rate cuts in the second half of this year.
The core PCE inflation index is expected to rise a modest 0.1% this month. Over the course of this year, it is expected to increase 2.6% from last year. Further, headline PCE inflation is expected to be weak at 0.10% for the month. Consumer spending is projected to drop by –0.2%. This second-quarter drop reflects a much-needed reversion to normal levels following a spike in first-quarter spending.
Market Reactions and Federal Reserve Expectations
Futures markets are preparing for a much larger-than-expected public release next Thursday. They’re particularly intently eyeing how it could affect the Federal Reserve’s interest rate plans. According to current market sentiment, there is an 18% probability of a rate cut in July. The expectations jump dramatically for September, with an impressive 70% expecting a cut.
An upside surprise in the monthly core PCE print could reinforce hawkish views toward the Fed. This would lead to stronger short-term support for the U.S. dollar. Weaker-than-expected data would cause market participants to reassess the likelihood of a July rate cut. This change in tone follows a period of easing fears of high inflation becoming ingrained.
“We’re just trying to be careful and cautious.” – Fed Chairman Jerome Powell
This warning from Fed officials is a reminder that they want to see and sift through a lot more data before making a serious pivot in policy direction. Let’s review what’s happened since the central bank declared it would remain on the sidelines. It is looking for better guidance on the overall impact of tariffs on pricing.
Insights from Analysts
Recently, analysts have released their forecasts for what to expect in May’s inflation report. They want to focus on a controlled trajectory for core PCE inflation. TD Securities expects a core PCE monthly increase of 0.14%, similar to what we saw in April. They forecast headline PCE inflation to show even lower growth at 0.10%.
“We look for core PCE prices to stay subdued in May, rising 0.14% MoM after a similar increase in April. Headline PCE inflation should also come in soft at 0.10%. On a year-over-year (YoY) basis, we look for core PCE inflation to rise by one-tenth to 2.6% (headline: 2.3%). Separately, we forecast personal spending to decline 0.2% MoM as normalization after front-loading outlays in Q1 continues.” – TD Securities
This forecast is a continuation of the widely-held view that inflation will not be a significant near-term risk. Ultimately, this gives the Fed much greater flexibility in how it frames its decisions.
Implications for Investors and Markets
Investors should note the upcoming release of the PCE Price Index data on December 1st. It can still be a highly influential force on market dynamics and trading strategy, too. The euro has continued to climb against the dollar, hitting its highest value since September of 2021. Right now, analysts think this upward trend can persist as we come up on the inflation release.
“The 14-day Relative Strength Index (RSI) is prodding the overbought territory in the lead-up to the PCE inflation release as EUR/USD sits at its highest since September 2021. The leading indicator suggests that there is more room for upside before a pullback could seep in.” – Dhwani Mehta
As traders and investors brace for potential volatility surrounding the PCE data, their strategies may shift based on how closely actual figures align with expectations.