Source: Caixin.

Tonight, the US May core personal consumption expenditure price index (PCE), which is the most favored inflation index by the Federal Reserve, will be released.

According to economists' expectations, tonight's PCE data may be a milestone in the US inflation cooling road: since the US core PCE index first exceeded the 2% inflation target in March 2021, this month's data will be a new low in these 38 months.

Another milestone on the US inflation cooling road?

According to Dow Jones' forecast, the overall PCE for May is expected to remain flat month-on-month, while core PCE is expected to rise by 0.1% month-on-month. In comparison, the month-on-month increases in April were 0.3% and 0.2%, respectively. The year-on-year increase in the overall PCE and core PCE for May in the US are expected to be 2.6%.

If the market's expectations are reliable, this will be a milestone month for the US PCE series data: the US May PCE will be basically unchanged from the previous month, which will be the first time since November 2023. But more importantly, after excluding the prices of foods and energy with large fluctuations, the year-on-year increase in US core PCE in May is only 2.6%, which is the lowest since March 2021.

For economists who are highly concerned about the US macroeconomy, March 2021 will not be unfamiliar—it is the time when the US core PCE data first exceeded the 2% inflation target in this round of economic cycle.

In March 2021, the US core PCE index rose 2.25% year-on-year, surpassing the threshold target of 2% for the first time in this round of economic cycle, which also became the starting point for the accelerated soaring of US inflation. Since then, US inflation has been soaring, and even the year-on-year rate of core PCE index has once exceeded 5.5%, which has forced the Federal Reserve to carry out a series of aggressive rate hikes. However, so far, the Federal Reserve has not been able to pull this index back below the 2% threshold.

If the year-on-year increase in the US core PCE data released tonight can really meet expectations, it will become a key milestone on the US inflation cooling road.

US inflation data is expected to cool down

Beth Ann Bovino, Chief US Economist at Bank of America, said: 'Our expectation is that the core personal consumption expenditure (PCE) data will show softness...This is good news for the Federal Reserve. It also has good news for people's wallets, although I don't know if people will feel it.'

In fact, although the US inflation rate has fallen sharply from the peak in mid-2022, for consumers, the price level does not seem to have fallen much. Since March 2021, US core personal consumption expenditure has risen by 14%, which has greatly damaged the quality of life of US consumers.

Although progress has been made in cooling down US inflation since the Fed began to hike rates in March 2022, Fed officials are not ready to declare victory just yet. Earlier this week, Fed Governor Lael Brainard said, 'Sustainably returning inflation to our 2% target is a process, not a fait accompli.'

Recently, many Fed officials have expressed cautious attitudes towards the timing and pace of rate cuts. However, most officials have also emphasized that if the trend of US inflation data cooling down meets expectations, rate cuts may be possible later this year.

The market is more optimistic than the Federal Reserve

At the Fed meeting this month, the Fed dot plot shows that only one rate cut is expected during the year. However, the market is still more optimistic: the trend of the futures market shows that the Fed is very likely to cut interest rates by 25 basis points for the first time in September, and cut rates again before the end of this year.

Bank of America's Bovino said, 'We do expect the US real economy to soften-not a freefall, but soften-this suggests later on that inflation will also soften. That gives us reason to expect that the Federal Reserve may cut interest rates for the first time in September.'

Now we all know that this depends on the data, and the Federal Reserve is still watching,' she added. 'Can they wait? Will they only cut interest rates once this year? I can't rule that out. But it looks like those numbers might give them an excuse to cut interest rates twice this year.'

Editor/tolk