Economists React To May PCE Data: Inflation Metrics Cool Down, Rate Hike Expected In July

The Core Personal Consumption Expenditure (PCE) price index, the Federal Reserve’s preferred inflation measure, rose 4.6% year-over-year in May, lower than the expected 4.7%, according to data issued Friday by the U.S. Bureau of Economic Analysis.

The market adjusted expectations for a Fed rate hike, although a 25-basis-point increase in July remains likely.

Several prominent economists offered insights on the figures:

Jeffrey Roach, Chief Economist at LPL Financial, highlighted the stagnation of real personal spending in May and a downward revision of April’s estimates. Stagnation, he suggested, indicates a slowdown in consumer demand.

“Real consumer spending was stagnant in May after only a modest gain in April as consumers slowed spending habits,” Roach said. He predicts that as the consumer spending splurge nears its end, inflationary pressures will ease throughout the remainder of the year, but it might take a few quarters before the markets see material improvements in services inflation.

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Quincy Krosby, Chief Global Strategist at LPL Financial, echoed Roach’s sentiments.

“While the immediate reaction in equity markets remains positive, stubborn core inflation remains intact, pushing ten-year and two-year yields higher,” Krosby said, agreeing with Roach’s prediction that the figures underline the likelihood of a July 26 rate hike.

Gina Bolvin, President of Bolvin Wealth Management Group, offered an optimistic take. She believes that while PCE remains stubborn, progress is being made, expecting inflation to settle around 3% by the end of the year.

“Last month we received blockbuster homebuilding data. New permits are up and when this pipeline of supply hits the market, it will put downward pressure on rents. This is important because housing is sticky inflation and is almost a third of total inflation,” Bolvin said.

Jamie Cox, Managing Partner for Harris Financial Group, viewed the PCE data as good news on the inflation front, saying that if the Fed holds firm at current levels, it will prevent overcorrection and avoid causing an unnecessary recession.

“This is excellent news on the inflation fight. If you don't believe disinflation is happening, you aren't paying attention,” Cox said.

The economist’s viewpoints underscore the market’s cautious optimism in the face of slightly cooler inflation.

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