PCE inflation report likely to show little or no price increases in past month

PCE inflation report likely to show little or no price increases in past month

The Federal Reserve has been waiting for good news on inflation all year — and now it looks like it’s going to get it on Friday.

Here are the key numbers to watch in the May PCE inflation report.

Prices not going up as fast

The PCE index, the Fed’s preferred U.S. inflation gauge, is forecast to show no change in May. If so, it would be the first time in six months that inflation didn’t go up.

A benign PCE report was foreshadowed earlier this month by a pair of inflation reports on consumer and wholesale prices. The consumer price index was flat in May and the producer price index fell.

Both of these reports feed into the PCE.

Core inflation

Another measure that strips out food and energy, known as the core rate of inflation, is expected to rise a tepid 0.1% in May. The core rate is viewed a better predictor of future inflation.

That would be the smallest increase since last November. The last time the core rate declined was in April 2020 at the height of the pandemic.

Longer run inflation

If the report goes according to plan, the rate of inflation would edge closer to the Fed’s goal of 2%.

The yearly increase in headline PCE could slow to 2.6% from 2.7%.

The 12-month increase in the core rate, meanwhile, could dip to 2.6% from 2.8% and touch the lowest level since the spring of 2021.

Short-run inflation

Top Fed officials are also paying close attention to the three- and six-month annualized rates of inflation to get a sense of the most recent trend in prices.

These annualized rates tell us what inflation would look like if it rose for the full year at the same rate as it did in the last three months or the last six months.

The three-month annualized rate of core PCE inflation fell to as low as 1.6% in December before spiking to 4.4% in March.

The three-month rate has since dropped back to 3.5%.

Six-month trend

The six-month annualized rate of core inflation has been more steady, but it was still rising at a 3.2% clip in April.

Fed Gov. Lisa Cook, in a speech on Tuesday, predicted the 12-month rate of PCE inflation would get stuck near current levels for the rest of the year because of some high readings in 2023.

Yet she also said she expects the three- and six-month annualized rates to move closer to the Fed’s 2% goal.

“My forecast is that three- and six-month inflation rates will continue to move lower on a bumpy path, as consumers’ resistance to price increases is reflected in the inflation data,” she said.

Under the current scenario, the Fed is likely to cut interest rates at least once and perhaps twice this year.