The Fed's favorite inflation gauge, set to reach a 3-year low?

After the cooling down of the Consumer Price Index (CPI) in April, the progress of US inflation is once again facing a crucial test. At 20:30 Beijing time today (8:30 Eastern Time), the US Department of Commerce will release the relevant data for April Personal Consumption Expenditures (PCE).

The market currently expects the overall PCE price index for April to rise by 0.3% month-on-month, in line with the previous value, and is expected to remain flat year-on-year at 2.7%. The core PCE price index is expected to rise by 0.3% month-on-month, in line with the previous value, and the core PCE price index is expected to remain flat year-on-year at 2.8%.

If the year-on-year growth rate can slightly slow down, then the core PCE price index will achieve the lowest annual growth rate in three years since April 2021.

As the preferred inflation indicator of the Federal Reserve, the PCE price index has more predictive significance for the interest rate cut timing compared to the CPI.

Goldman Sachs analysts pointed out:

We estimate that the core PCE price index will increase by 0.26% month-on-month, significantly lower than the average of 0.36% in the previous three months. However, if this pace can only be maintained in May and June, it may not be enough to push the Federal Reserve to cut interest rates in July.

Scott Anderson, Chief US Economist at Montreal Bank Capital Markets, believes that the core PCE price index for April may see slight improvement, but "do not expect earth-shattering changes", as the data is not enough to make the Federal Reserve abandon its wait-and-see approach.

He stated:

The Federal Reserve will still be in a wait-and-see mode, as they need to assess whether the restrictive nature of monetary policy is sufficient to bring the PCE price index down to the 2% target.

Investment institution Newsquawk pointed out in its preview report on the PCE report:

The overall CPI data for April was lower than expected, while the core CPI index saw its smallest increase since December; although the PPI data unexpectedly rose that month, the internal data (components of the PCE data) were more constructive (insurance industry, health and medical components, air transport). It is worth noting that in the PCE data, the weights of housing and transportation are much smaller (transportation insurance industry inflation is currently soaring, which is the biggest factor driving CPI inflation), which is why from the perspective of the PCE price index, the overall core inflation rate is much lower.

Following the recent hawkish FOMC meeting minutes, cautious comments from Federal Reserve officials, and better-than-expected PMI data, the market believes that the Federal Reserve will not ease its policy at the FOMC meeting on June 12, with only a 10% chance of an interest rate cut in July Although the market believes there is an 80% chance of a rate cut in November, the first fully priced rate cut is in December. Goldman Sachs recently pushed back its initial rate cut forecast from July to September