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Big inflation reading from the Fed on Friday. Here’s what to expect
But even more importantly, by excluding volatile food and energy prices, the core PCE price index, which draws even closer scrutiny from Fed policymakers, is expected to report its lowest annual reading since March 2021.
If that date sounds familiar, it will be when core PCE first surpassed the Fed’s coveted 2% inflation target during this cycle. Despite a series of aggressive interest rate increases Since then, the central bank has still failed to bring the pace of price increases back to its target.
Dow Jones’ official forecasts for Friday’s numbers are for the core PCE, or all-items, price reading to be flat on the month, while the core is projected to rise 0.1%. That would compare with the respective increases of 0.3% and 0.2% in April. Both the headline and core are forecast at 2.6% on an annual basis.
If the main PCE price predictions come true, it will serve as a milestone of sorts.
“We are in line with [the forecast] “We’re expecting the underlying PCE price data to be weak,” said Beth Ann Bovino, chief economist at U.S. Bank. “That’s good news for the Fed. It’s also good for people’s wallets, although I don’t know if people feel that yet.”
Indeed, while the inflation rate has retreated precipitously from its peak in mid-2022, prices have not. Since that March 2021 benchmark, core PCE has risen 14%.
This steep climb and its pernicious effect are why Fed officials are not yet ready to declare victory, despite the obvious progress made since the rate hikes started in March 2022.
“Returning inflation sustainably to our 2% goal is an ongoing process and not a fait accompli,” Fed Governor Lisa Cook said earlier this week.
Cook and his colleagues have been cautious about the timing and pace of rate cutsthough most agree that easing is likely at some point this year, as long as data remain in line. Futures markets currently predict a good chance that the Fed will issue its first quarter-percentage-point cut in September, followed by another by the end of the year. Policymakers at their meeting earlier this month agreed on just one cut.
“We expect a slowdown in the real economy — not a fall off a cliff, just a slowdown — which suggests that inflation will also be softer later. That gives us reason to expect that the Fed will probably be able to make its first cut in September,” Bovino said.
“Now we all know it depends on the data and the Fed is still watching,” she added. “Could they wait? Could it just be one and done this year? I can’t rule that out. But it looks like the numbers could give the Fed cover to cut rates twice this year.”
In addition to the inflation numbers, the Commerce Department at 8:30 a.m. ET will release numbers on personal income and consumer spending, with estimates of increases of 0.4% and 0.3%, respectively.