People buy drinks at a store on a hot afternoon in Brooklyn, New York, on the first day of summer on June 21, 2024.
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There could be some good news on inflation from the Commerce Department when it releases a major economic report on Friday.
The personal consumption expenditures price index, a closely watched gauge of inflation by the Federal Reserve, is expected to show little, if any, monthly increase for May, the first time that will be the case since November 2023.
But more importantly, when volatile food and energy prices are excluded, the core PCE price index, which is under more close scrutiny by Fed policymakers, is set to report its lowest annual reading since March 2021.
If this date is anything to go by, it’s when core personal consumption expenditures first exceeded the Fed’s 2% inflation target during this cycle. Despite a series of aggressive interest rate hikes since then, the central bank has yet to get the pace of price increases back to its target range.
The Dow Jones Industrial Average’s official forecast for Friday’s numbers is for the headline PCE price reading to remain flat during the month, while core prices are expected to rise 0.1%. That compares with increases of 0.3% and 0.2%, respectively, in April. Both headline and core prices are expected to rise 2.6% on a year-over-year basis.
If core PCE price forecasts come true, it will be a milestone of sorts.
“We agree with (the expectation) that the core PCE data will come out weak,” said Beth Ann Bovino, chief economist at U.S. Bank. “That’s good news for the Fed. It’s also good news for people’s wallets, although I don’t know if people are feeling that yet.”
In fact, although inflation has declined sharply from its peak in mid-2022, prices have not. Since that benchmark in March 2021, core PCE has risen 14%.
This sharp rise and its malignant impact is why Fed officials are not ready to declare victory yet, despite the clear progress made since the start of rate hikes in March 2022.
“Getting inflation sustainably back to our 2% target is an ongoing process, not a fait accompli,” US Federal Reserve Governor Lisa Cook said earlier this week.
Cook and her colleagues have been cautious about the timing and pace of rate cuts, though most agree that an easing of inflation is likely sometime this year as long as data remain consistent. Futures markets are currently pricing in a good chance that the Fed will cut rates for the first time by a quarter-percentage point in September, followed by another by the end of the year. Policymakers had only scheduled one cut at their meeting earlier this month.
“We expect a real economy to slow down — not fall off the cliff, just slow down — which suggests that inflation will also slow down later on,” Bovino said. “That gives us reason to expect the Fed to deliver its first rate cut in September.”
She added, “Now we all know that it depends on the data and that the Fed is still monitoring the situation. Can they wait? Could the bank cut interest rates only once this year? I cannot rule out this possibility. But it seems that the numbers may give the Fed The Fed will cut interest rates twice this year.
In addition to the inflation numbers, at 8:30 a.m. ET the Commerce Department will release personal income and consumer spending numbers, with estimates of increases of 0.4% and 0.3%, respectively.
