What To Expect In Friday’s Report on the Fed’s Preferred Measure of Inflation

Inflation has declined in recent months, and a report due Friday is expected to provide further evidence that price increases are easing.

Forecasters expect inflation as measured by the Personal Consumption Expenditures (PCE) index slowed down in May, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal. The median forecast calls for PCE prices to have risen 2.6% over the past 12 months, down from 2.7% in April. “Core” inflation, which excludes volatile prices for food and energy, likely slipped to 2.6% from 2.8%, reaching its lowest level since March 2021 and inching towards the Federal Reserve’s goal of a 2% annual rate. 

If those forecasts are correct, it would confirm what a separate report earlier this month on the Consumer Price Index (CPI) showed: Inflation may still be running too hot for the liking of Fed officials and many household budgets, but it’s on the way down. It would also indicate that a flareup of inflation in the first quarter was more of a bump in the road than a serious economic threat. 

What Does the Inflation Measure Mean for the Federal Reserve?

Friday’s inflation report is especially notable because officials at the Federal Reserve, tasked with keeping inflation under control, pay closer attention to PCE than CPI when setting their influential fed funds rate, which affects interest rates on mortgages, credit cards, car loans and other kinds of borrowing.

More inflation reports in line with expectations could pave the way for the Fed to cut the fed funds rate from its current 23-year high. The Fed has kept the rate high for more than two years to push down inflation by discouraging borrowing and spending.

Fed officials have said they need a string of good economic data to gain confidence that inflation is on a sustainable path down before they’ll consider any cuts.

Financial markets are pricing in more than a 60% chance that the first rate cut will happen at the Fed’s September policy committee meeting, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. 

Friday’s PCE report could be one bit of data pushing them in that direction.

“If matched by similarly mild inflation prints in coming months, the Fed should be on track to trim rates for the first time in over four years in September,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a commentary.