Source: Jin10 Data
The unexpected downturn of CPI and PPI has boosted Wall Street's optimism, and the Federal Reserve's predictions may be out of date.
Both price reports released this week have exceeded expectations, and the inflation index favored by the Federal Reserve will show the smallest increase since November.
The producer price index (PPI) released by the US Bureau of Labor Statistics on Thursday shows that the key categories of prices for the Personal Consumption Expenditures Price Index (PCE), the preferred index of the Federal Reserve, have fallen, and the PCE will be released later this month. In addition, the consumer price index (CPI) released on Wednesday was lower than expected, and some analysts predict that the so-called core PCE index (excluding food and energy) will only grow by 0.1% in May.
The latest quarterly forecast released by the Federal Reserve on Wednesday shows that officials' median expectation is for only one interest rate cut this year, which will help support two possible interest rate cuts starting in September.
After the data was released on Thursday, according to futures data, the probability of investors reducing interest rates by 25 basis points in September increased to about 65%, and the probability of reducing interest rates in December increased to about 80%.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients: 'Our mapping of the PPI and CPI data suggests that the core PCE chained index rose by just 0.11% in May, far below the average increase of 0.32% in the first four months of this year. Our estimates indicate there will be a substantial downside surprise.'
Other analysts said they expected similar moderate growth in the core PCE index. Paul Ashworth, chief economist for North America at Capital Economics, said the company also expects core PCE to grow by 0.11%. Citibank economists believe the increase will be 0.15%.
The main PPI categories used to calculate PCE showed a flat performance in May. Airline ticket prices fell by 4.3%, and investment portfolio management service prices fell by 1.8%. According to data from the US Bureau of Labor Statistics, the cost of physician care remained unchanged, and the cost of hospital outpatient care rose by 0.5%.
Interpretation of the CPI and PPI data suggests that the new quarter forecast released by the Federal Reserve on Wednesday may be outdated. These data show that Fed officials expect the core PCE index to reach around 2.8% by the end of this year, higher than the 2.6% forecast in March.
Federal Reserve Chairman Powell hinted at a press conference after the forecast was released that most decision-makers may not have updated their data to include CPI data released earlier that day. He believes these forecasts are 'conservative'.
Shepherdson said: 'The prospect of slowing rent hikes, declining wage inflation, and squeezed retailer profits suggests that the upward pace of the core PCE index will continue to be below the Fed's forecast this week, laying the foundation for the first interest rate cut in September and multiple easing policies this year.'
Editor/Lambor