Source: Wall Street News
Economists expect the US core PCE to rise 0.2% in April, which will be the smallest increase in the index since this year.
The “Federal Reserve's Favorite Inflation Index” to be announced next week — the core PCE may send a positive signal and stir up speculation about the Fed's interest rate cut expectations, which in turn affects the US stock market.
On May 26, according to economists' forecasts quoted by the media, the US Personal Consumption Expenditure Price Index (core PCE), which excludes food and energy prices, will rise 0.2% in April. This will be the index's smallest increase since this year, and the index is more reflective of potential inflation.
According to median forecasts from media surveys, nominal PCE will rise 0.3% for the third consecutive month. Compared with the almost flat data for the last three months of 2023, this year's upward trend highlights the uneven results achieved by the Federal Reserve in controlling inflation.
Furthermore, in terms of year-over-year data, nominal PCE and core PCE are expected to increase by 2.7% and 2.8%, the same as last month.
Federal Reserve Chairman Powell and his colleagues have always emphasized that more evidence is needed to prove that inflation will continue to fall back to the target level of 2% before interest rates can be cut.
Notably, a US government report suggests that when Federal Reserve officials talk about their 2% inflation target, they are referring to the PCE inflation index, not the CPI. The main differences between PCE and CPI are as follows:
First, the composition of PCE is different from CPI. The most relevant example is housing prices, which weigh about twice as much in the CPI index. “Housing is currently the biggest [factor] causing the difference,” said Preston Caldwell, chief US economist at Morningstar. He estimated that in February, of the 100 basis point difference between annual PCE and CPI readings, 90 basis points can be attributed to the higher weight of housing in the CPI. On the other hand, healthcare spending has more weight in PCE data.
Second, PCE can reflect the price consumers buy alternative products due to price changes, while CPI is based on a basket of fixed products. Eliminate factors such as brand loyalty and low price sensitivity. When the price of consumer goods rises, a rational consumer will pursue cheaper alternatives.
Therefore, the Federal Reserve believes that PCE is superior to CPI, precisely because PCE better reflects current prices and actual consumption expenditure patterns.
At the meeting earlier this month, Federal Reserve officials jointly stated that they would keep interest rates at a higher level for a longer period of time, and “many” people raised questions about whether the current policy was strict enough to reduce the inflation rate to the target level. This was confirmed by the minutes of the recent meeting.
Meanwhile, the latest PCE data will be released along with personal expenditure and income data. Despite strong demand growth in the first quarter, previously announced retail sales for April remained flat, so this data will provide a reference for service sector spending.
The media quoted economists as saying:
“This report is likely to give some positive signs that the decline in inflation has not completely stopped. Against the backdrop of a cooling labor market and a slowdown in income growth, consumer confidence is gradually weakening, which will continue to drive inflation downward for the rest of the year. However, inflation is likely to fall only very slowly this year as catch-up upward pressure on prices remains.”
editor/tolk