The Federal Reserve’s favored inflation gauge is set for the smallest advance since November following two better-than-expected reports on prices out this week.
Bureau of Labor Statistics data on producer prices Thursday showed declines in key categories that feed into the central bank’s preferred metric — known as the personal consumption expenditures price index, which is due later this month. Combined with softer-than-expected consumer price index data published Wednesday, several analysts expect the so-called core PCE gauge, which excludes food and energy, advanced just 0.1% in May.
Such a print would help bolster the case for two interest-rate cuts this year, likely beginning in September, after the central bank published updated quarterly projections Wednesday showing the median official expected just one reduction. Following Thursday’s data, investors boosted the odds of a quarter-point cut in September to about 65%, and the chances of a December cut to around 80%, according to futures.
“Our mapping of the PPI and CPI data suggests that the core PCE deflator increased by only 0.11% in May, well below the 0.32% average increase in the first four months of this year,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said in a note to clients. “Our estimate points to a material downside surprise.”
Other analysts said they expect similarly-muted increases in the core PCE gauge. Paul Ashworth, the chief North America economist at Capital Economics, said the firm is also estimating a 0.11% rise. Citi economists put the number at 0.15%.
Key PPI categories that help calculate the PCE were tame in May. Airfares fell 4.3% and prices for portfolio management services decreased 1.8%. Physician care costs were flat and the cost of hospital outpatient care rose 0.5%, according to the BLS.
The read-through from the CPI and PPI data suggest fresh quarterly projections published by the Fed on Wednesday afternoon may already be outdated. Those showed that officials expect the core PCE gauge to end the year at around 2.8%, up from 2.6% in the March forecast round.
Fed Chair Jerome Powell, in a press conference following the release of the projections, hinted most policymakers may not have updated their numbers to incorporate the CPI data out earlier in the day. He characterized the projections as “conservative.”
“The outlook for slower rent gains, falling wage inflation, and margin compression at retailers suggests that the core PCE deflator will continue to rise more slowly than the Fed predicted this week, laying the foundations for the first rate cut to come in September and multiple easings this year,” Shepherdson said.
This article was provided by Bloomberg News.