Fed's Preferred Inflation Gauge Set To Drop To 38-Month Low: 'This Could Provide The Impetus For Another Rally To Fresh Highs'

Traders are preparing for the release of the Personal Consumption Expenditure (PCE) price index data, widely regarded as the Federal Reserve’s preferred inflation measure, scheduled for Friday.

The Bureau of Economic Analysis will release this key inflation indicator alongside data on personal income and personal spending.

The key focus for investors is whether the Fed’s inflation gauge has decreased as economists currently predict. A drop would bolster confidence in efforts to steer price pressures toward the 2% target and strengthen expectations for upcoming interest rate cuts.

May’s PCE Price Index Report: What Economists Expect

• The PCE price index is expected to slow from 2.7% year-on-year in April to 2.6% year-on-year in May, as estimates gathered by Econoday show. The consensus range is between 2.5% and 2.7%.
• On a monthly basis, the PCE price index is seen advancing at a 0.1% pace, slowing down from the previous 0.3%.
• The core PCE price index is set to ease from 2.8% to 2.6% year-on-year in May, which could mark the lowest level since March 2021.
• On a monthly basis, the core PCE price index is predicted to slow from 0.2% to 0.1%.

Previous Report And Economist Views

In April, the headline PCE inflation rate remained steady at 2.7% year-on-year. The core PCE price index also matched expectations with a 2.8% year-on-year increase, though it came in slightly lower than monthly estimates (0.2% vs. 0.3%).

In its June economic projections, the Fed revised the Personal Consumption Expenditure (PCE) inflation forecast for 2024 from 2.4% to 2.6% and for 2025 from 2.2% to 2.3%. Expectations for 2026 and the longer term remained unchanged. The forecast for core PCE inflation also increased from 2.6% to 2.8% in 2024 and from 2.2% to 2.3% in 2025.

Bank of America economist Michael Gapen expects core PCE inflation to rise by only 0.16% month-on-month in May (down from 0.3% previously) and to decrease a tenth to 2.6% year-on-year.

“This supports our view that disinflation is the most likely path forward, making a sustained reacceleration in inflation unlikely,” Gapen added.

Bill Adams, chief economist for Comerica Bank, predicts the overall headline PCE inflation rate will fall to 2.4% year-on-year. “In annual terms, PCE inflation likely slowed to the lowest rate since inflation began skyrocketing in early 2021.” When excluding food and energy items, Comerica Bank sees core PCE inflation falling to 2.6%.

“We expect the Fed’s preferred inflation gauge will continue to show progress toward its 2.0% target,” Wall Street veteran investor Ed Yardeni, stated.

“Bulls will be hoping for further evidence that inflation is continuing to soften. If so, this could provide the impetus for another rally to fresh highs,” David Morrison, senior market analyst at Trade Nation, said.

On Wednesday, the tech-heavy Nasdaq 100 index, tracked by the Invesco QQQ Trust QQQ, traded just 1.4 percentage points below its record high set last week, while the S&P 500, monitored through the SPDR S&P 500 ETF Trust SPY was less than a percentage point away from its peak.

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