US Core PCE expected to make limited progress

The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditure (PCE), will be released by the US Bureau of Economic Analysis (BEA) on Friday, June 30 and as markets get closer to the release time, here are the forecasts of economists and researchers of seven major banks.

Core PCE is expected to stay at 4.7% year-on-year while rising 0.4% in May (MoM). The headline is seen increasing by 0.5% in May.

TDS

We expect core PCE inflation to tick a tenth lower to 0.3% MoM in May, which would also undershoot the core CPI’s stronger 0.4% MoM gain. The YoY rate likely also fell to 4.6%, which would mark its slowest annual pace since October 2021. However, more relevant for us (and the Fed), we also expect the key core services ex-housing series to slow to 0.2% MoM, which would represent the smallest gain in the series since July. Note that inflation in this component has been stuck around the 0.3%-0.6% MoM range since March last year (excluding a one-off decline in July), signaling how sticky inflation has remained in the services segment. If our forecast is correct, the 3-month annualized pace would drop significantly to 3.6% from 4.4% in April.

NBF
The annual core PCE deflator may have progressed 0.3% in May, leaving the 12-month rate unchanged at 4.7%.

Citi
Elements of CPI and PPI lead Citi Research to forecast a 0.29% MoM increase in core PCE inflation in May, with the YoY measure moderating to 4.61%, with core services prices excluding housing rising by just 0.18% MoM, the softest increase in this component since a decline in July 2022. Meanwhile, headline PCE inflation should rise a more modest 0.1% MoM due to falling energy prices, and moderate to 3.8% YoY. Base effects will imply headline PCE falls even further YoY in June.

Credit Suisse
The PCE deflator is likely to confirm that while gradual disinflation is continuing in headline inflation, core PCE inflation remains sticky above the Fed’s target. Core PCE inflation likely remained at 0.4% MoM in May, meaning YoY core inflation will remain at 4.7%, virtually unchanged from seven months ago. Headline inflation is likely to decline to 0.1% MoM and 3.9% YoY as energy prices declined in May.

Danske Bank
We forecast a small decline from 5.3 to 5.1%.

Deutsche Bank
We expect the core PCE deflator to soften a tenth on both the monthly (0.3% MoM vs 0.4% last month) and YoY (4.6% YoY from 4.7% last month) readings. We point out that to meet the Fed’s forecast of 3.9% YoY core PCE this year we would need around 27 bps of monthly prints into YE. We actually expect 3.6%. So, all else being equal these prints could be the swing factor between 1-2 Fed hikes out to YE in their own dot plots.

CIBC
The Fed’s preferred gauge of inflation, core PCE prices, likely maintained a 0.4% monthly pace, which is still too hot for the Fed’s liking, and that will leave the annual pace of core inflation unchanged at 4.7%.