People buy drinks at a store on a hot afternoon in Brooklyn, New York, on the first day of summer, June 21, 2024.
Spencer Pratt | Getty Images
There could be some pretty good news on inflation when the Commerce Department releases its big economic report on Friday.
The Personal Consumption Expenditures Price Index, an inflation gauge closely watched by the Federal Reserve, is expected to show little to no monthly increase in May, its first such increase since November 2023.
But more importantly, the core PCE price index, which excludes volatile food and energy prices, is on track to post its lowest annual reading since March 2021 amid increased scrutiny from Fed policymakers.
If that date sounds familiar, it’s the day that core PCE surpassed the Fed’s coveted 2% inflation target for the first time this quarter. Since then, despite a series of aggressive interest rate hikes, the central bank has been unable to bring the pace of price growth back within its target range.
Dow Jones’ official forecast for Friday’s PCE price index is for the headline to be flat month-over-month and the core index to rise 0.1%, up from April’s 0.3% and 0.2% gains, respectively. Both the headline and core indexes are expected to rise 2.6% year-over-year.
If the core PCE price forecast comes true, it will mark something of a milestone.
“we [the forecast] “We expect the PCE core price data to be soft,” said Beth Ann Bovino, chief economist at U.S. Bank. “That’s good news for the Fed. It’s good for people’s wallets, but we’re not sure people are feeling that yet.”
In fact, inflation has fallen sharply from its peak in mid-2022, but prices have not fallen. Core PCE has risen 14% since the March 2021 benchmark.
It’s this sudden increase and its damaging effects that have led Fed officials to say they’re not ready to declare victory just yet, despite clear progress since rate hikes began in March 2022.
“Returning inflation sustainably to our 2 percent objective is an ongoing process, not a fait accompli,” Fed Governor Lisa Cook said earlier this week.
Cook and his colleagues are cautious about the timing and pace of rate cuts, but most agree that easing is likely sometime this year if the data matches expectations. Futures markets currently expect the Fed to cut rates by a quarter of a percentage point in September, with one more cut likely by the end of the year. Policymakers met earlier this month expecting just one rate cut.
“We are expecting a softening in the real economy — not a sharp drop, just a softening — which suggests inflation will also ease over time. That gives us reason to expect the Fed will likely be able to deliver its first rate cut in September,” Bovino said.
“We all know it all depends on the data, and the Fed is continuing to watch,” he added. “Will the Fed wait? Will it be a one-and-done for this year? We can’t rule it out. But it looks like the numbers might give the Fed an excuse to cut rates twice this year.”
In addition to the inflation numbers, the Commerce Department is scheduled to release personal income and consumer spending figures at 8:30 a.m. ET, which are expected to show increases of 0.4% and 0.3%, respectively.
