Utility commissions and their advocates This report is right on time. It provides unique and highly useful information about price changes for basket of goods/services bought by consumers in the U.S. The expected outcomes will greatly influence market sentiment. Perhaps most importantly, they will shape how the Federal Reserve acts in the future.
Wall Street analysts are forecasting the core PCE inflation rate to fall to 2.5%, down from 2.6% over the last year. This change is an indication of a minor pullback in upward price pressures. Plug in the headline annual PCE inflation, and it looks like that measure will retreat to 2.2%, down from 2.3%. These metrics are vital as they assist the Federal Reserve in determining monetary policy adjustments, including potential interest rate cuts.
PCE Price Index Overview
The PCE Price Index, which is released monthly by the BEA, measures the changes in prices for goods and services consumed by households. FOMC members have stated that it is their preferred core inflation indicator and one that they track the most closely. Our April forecast indicates a 0.1% month-over-month increase in core PCE inflation. This comes after a flat reading in March, with a year-over-year increase expected at 2.5%.
The importance of this data is its potential to inform intervention decisions by the Federal Reserve. Anything 0.3% or better MoM print would add support for the U.S. Dollar. 0% or below would be bad because it would harm its chances of outperforming big competition.
With inflation still far above the Fed’s target, worry has shifted to the risk of lasting inflationary pressure. New York Fed President John Williams warns that we must focus on keeping inflation from becoming ingrained. If we fail to do so now, we will face the prospect of a more permanent inflationary trend.
“The right thing for them to do is to await further clarity before taking the next policy step.” – Fed Chairman Jerome Powell
Market Expectations and Potential Impacts
Market positioning implies that the U.S. Dollar has a structural upside should the monthly core PCE rise outperform expectations. Should inflation drop below 2%, the Federal Reserve would be obliged to respond. They should look at additional tools, like lowering the federal funds target rate to spur more borrowing and spending. Traders are obviously on the lookout that the coming PCE inflation numbers might tilt the scale in one direction or the other on future monetary policy.
TD Securities analysts aren’t forecasting a big splash in core PCE prices when the April numbers are released. They forecast a conservative 0.1% increase m/m after the very strong 0.7% advance in March, reflecting front-loading effects. Their forecast for headline PCE inflation is just 0.06%, adding to the forecasts of a less bumpy inflation road ahead.
“We look for core PCE prices to remain subdued in April, rising 0.1% m/m after printing flat in March—though last month’s data will be revised higher.” – TD Securities
Inflation Trends and Federal Reserve Strategy
According to former Federal Reserve chair Janet Yellen, the current inflationary landscape is truly unprecedented. Looking ahead, those forecasts see annual PCE inflation falling a bit to 2.2%. The continued inflationary pressures put a question mark on any future rate cuts.
As Fed Chairman Jerome Powell has said, there’s great uncertainty around economic factors, such as tariffs which could be impacting inflation’s dynamics. He noted that there remains “a great deal of uncertainty about tariffs,” emphasizing the complexity of the current economic climate.
Markets are looking ahead to the upcoming release of the PCE data. Investors will be eager to hear how these numbers match up with expectations and what they could mean for the Fed’s future decisions. Analysts and investors alike will be closely watching these developments, as they have the potential to foreshadow broader changes in economic policy going into 2021.