Forecasts for May PCE Report Show More Improvement On Inflation

Forecasts for the May Personal Consumption Expenditures Price Index show inflation continuing to slow, driven by falling gas prices and more deflation in consumer goods.

On an annual basis, PCE inflation in May “could slow to the [lowest level] since early 2021, which would be tangible progress toward the Fed’s 2% target,” says Bill Adams, chief economist at Comerica Bank.

More progress on the Federal Reserve’s preferred measure of price pressures could pave the way for rate cuts later this year and reassure investors, who will be watching the data closely for evidence the slow downward trend in consumer price growth is continuing.

Economists expect the overall PCE Price Index to rise 2.6% on an annual basis in May, according to FactSet’s consensus estimates. That’s slightly lower than the 2.7% increase in April. On a monthly basis, forecasts call for the PCE to be flat from April, at 0.26%.

The core measure of PCE inflation (which excludes volatile food and energy prices) is expected to moderate to 2.6% annual growth in May from 2.8% growth in April. On a monthly basis, economists anticipate growth of 0.10%, down from 0.25% in April.

Scott Anderson, chief US economist at BMO Capital Markets, also forecasts that headline PCE inflation will be unchanged in May. “That’s the good news,” he says. “It suggests that any slowing we’re going to see on GDP growth and consumer spending is likely to be pretty gradual. We’re still on this soft landing trajectory, and I think the data this Friday will keep the door open for a September rate cut from the Fed.”

While the Fed uses PCE inflation for its targets, the Consumer Price Index tends to make more headlines, since it’s released ahead of the PCE report. The two indexes are calculated differently, and the PCE index tends to come in lower than its counterpart. “We’re likely to see core PCE persist below core CPI for as long as housing inflation remains high, owing to the latter’s higher weight to housing,” says Morningstar chief US economist Preston Caldwell.

May PCE Report Forecast Highlights

• PCE report release date and time: Friday, June 28 at 8:30 a.m. EDT.
• The PCE Price Index is forecast to remain flat in May after rising 0.26% in April.
• Core PCE is forecast to rise 0.10% in May after rising by 0.25% in April.
• The PCE Price Index year over year is forecast to rise to 2.6% in April after increasing 2.7% in April.
• Core PCE year over year is forecast to rise 2.6% in May after increasing 2.8% in April.

More Progress On Inflation

Overall, “we’re expecting to see some better news on inflation after it’s moved mostly sideways since the start of the year,” says Adams. He points to a pullback in gasoline prices in May as one reason for the improvement. This is unusual, since gas prices tend to rise in the summer. “We haven’t seen the typical [seasonal] increase in energy prices this year,” Adams explains. He also points to a more modest increase in healthcare reimbursement rates.

Anderson is watching continued price weakness in the goods sector. “Consumers are scaling back on discretionary spending,” which he says is leading some retailers to slash prices. Those cuts are also supported by a strong dollar and falling import prices, which make it easier for retailers to pass their savings on to consumers.

Meanwhile, analysts from Bank of America point to falling portfolio management prices and airfares. Together these factors are helping pull down both the headline and core PCE measures.

A Mixed Picture Under the Surface

But not every component of inflation is trending down. Shelter prices remain elevated, as they have been for the better part of the past year. Bank of America analysts also note that hospital services prices rose sharply in May, while analysts at the BlackRock Investment Institute recently wrote that sticky services prices mean “inflation will continue to outpace the Fed’s 2% goal in the medium term.”

When Will the Fed Cut Rates?

Federal Reserve Chair Jerome Powell has underscored that he does not expect the central bank to cut rates until officials have gained more confidence that inflation is falling sustainably toward its target. Markets see a 53% chance that the Fed will cut rates by a quarter point at its September meeting, according to the CME FedWatch tool, and a 50% chance that the first cut will come in November.

Morningstar’s economics team expects the first cut in September, while Bank of America is in the December camp. “We think that the Fed will need to see more than just a few months of favorable inflation data to gain enough confidence to ease,” BofA analysts wrote.

Anderson says that absent a “huge downward surprise in spending or inflation,” a cut at the Fed’s next meeting in July is unlikely.