US PCE Figures Show Slowest Inflation Pace Since April 2021

Consumer prices in the US economy remained unchanged in May, with price drops in goods balancing the rise in services costs. The latest report from the Commerce Department indicates a softer pace of underlying prices, boosting optimism for a potential 'soft landing'. The flat reading in the personal consumption expenditures (PCE) price index for May follows an unrevised 0.3% gain in April. Goods prices fell 0.4%, the biggest drop since November, with gasoline and other energy goods experiencing the largest slide in six months. On the other hand, the cost of services increased 0.2%, driven by higher prices for housing and utilities, as well as healthcare [79bbd5f1].

The Federal Reserve has been closely monitoring inflation trends and has stated that it will not consider interest rate cuts until it is confident that price increases are sustainably slowing to its 2% target. If the trend of easing inflation continues for another two months, the Fed may consider a rate cut in September. Lower interest rates would have a positive impact on borrowing rates for consumers and businesses. Traders have already raised their bets for a Fed rate cut in September [79bbd5f1].

The latest figures suggest that inflation pressures are continuing to ease, although at a slower pace compared to last year. The Fed's preferred inflation gauge, the PCE price index, also showed a second consecutive month of easing inflation in May. In addition to the easing of inflation, the report from the Commerce Department also revealed that consumer spending rose 0.2% in May, supported by a 0.3% gain in services and a 0.2% rebound in goods spending. Personal income increased 0.5%, and wages shot up 0.7%. The saving rate rose to 3.9%, and spending adjusted for inflation rebounded 0.3% [79bbd5f1].

The mild performance of consumer prices in May, with no change from the previous month, is the mildest in over four years. Prices rose 2.6% from a year earlier, slightly less than in April. Core inflation, which excludes food and energy prices, rose 0.1% from April to May, the smallest increase since spring 2020 [14b1177f].

According to a report from Cheddar, consumer prices in the US were flat from April to May, with core inflation rising 0.1% during the same period, the smallest increase since 2020. Prices for physical goods fell, including a 3.4% drop in gasoline prices and a 1% decrease in furniture prices. On the other hand, prices for services, such as restaurant meals and airline fares, increased by 0.2%. The Federal Reserve closely tracks this measure of prices and the latest figures suggest that inflation pressures in the US economy are continuing to ease. The Fed may consider cutting interest rates in September if the trend of slowing inflation continues for another two months. The Fed raised its benchmark rate 11 times in 2022 and 2023 to curb inflation. Inflation remains above pre-pandemic levels, which is a concern for President Joe Biden's re-election bid. The latest consumer price index also showed that inflation eased in May for a second straight month. Consumer spending and incomes both picked up in May, with spending rising 0.3% and after-tax income increasing by 0.5%, the biggest gain since September 2020 [18a26428].

The Federal Reserve's preferred measure of underlying U.S. inflation, the PCE price index, decelerated in May, bolstering the case for lower interest rates later this year. The index, which excludes food and energy prices, rose 0.1% from April to May, the smallest increase since spring 2020. This supports the Fed's stance that it will not consider interest rate cuts until it is confident that price increases are sustainably slowing to its 2% target. If the trend of easing inflation continues for another two months, the Fed may consider a rate cut in September. Lower interest rates would have a positive impact on borrowing rates for consumers and businesses [fa7e3928].

Incomes have outrun inflation for the 17th month in a row. Disposable income, adjusted for inflation, jumped by 0.5% in May from April, the biggest increase since January 2023. Inflation-adjusted disposable income rose by 1.1% compared to a year ago. Transfer receipts, adjusted for inflation, rose by 0.5% in May from April, and by 2.0% year-over-year. The personal saving rate rose to 3.9%. Consumer spending, adjusted for inflation, rose by 0.3% in May from April, and by 2.4% from a year ago. Spending on services, adjusted for inflation, rose by 0.1% for the month and by 2.8% year-over-year. Spending on nondurable goods, adjusted for inflation, rose by 0.3% in May from April, and by 1.6% year-over-year. Spending on durable goods, adjusted for inflation, jumped by 1.1% for the month, after having declined the month before [a5bfabfb].

US monthly inflation was unchanged in May as a modest increase in the cost of services was offset by the largest drop in goods prices in six months. Consumer spending rose marginally. Underlying prices advanced at the slowest pace in six months, raising optimism that the US central bank could engineer a much-desired 'soft landing' for the economy. Traders raised their bets for a Fed rate cut in September. The flat reading in the personal consumption expenditures (PCE) price index last month followed an unrevised 0.3% gain in April. Goods prices fell 0.4%, the biggest drop since November. In the 12 months through May, the PCE price index increased 2.6% after advancing 2.7% in April. Inflation is receding after spiking in the first quarter as 525 basis points worth of rate hikes from the Fed since 2022 cool domestic demand. Financial markets saw a roughly 68% chance that the Fed's policy easing would start in September compared to about 64% before the data. Gazprom, Russia's state-owned gas company, plans to start annual pipeline gas exports to China of 10 billion cubic meters in 2027. The Power of Siberia pipeline to China will reach its planned capacity of 38 billion cubic meters per year in 2025. [25d9f2d5]

A measure of prices closely tracked by the Federal Reserve suggests that inflation pressures in the U.S. economy are continuing to ease. The Commerce Department report showed that consumer prices were flat from April to May, the mildest such performance in more than four years. The Personal Consumption Expenditures Price Index, which is the Fed's preferred inflation gauge, rose 3.4% in May from a year earlier, down from 3.6% in April. The easing of price pressures could alleviate concerns about rising inflation and potentially impact the Fed's decision on monetary policy. The report comes amid ongoing concerns about the impact of the COVID-19 recession on the economy.

The equity markets were flat for the week, with small cap stocks and industrials not participating much in the market run-up. The housing market is showing signs of slowing down, with existing home sales, pending home sales, and new home sales all declining. Despite the slowdown, home prices are still rising, but it is expected that they will soon start falling. The Personal Consumption Expenditure (PCE) Deflator, the inflation measure preferred by the Fed, came in flat, but the market's odds for a rate cut have risen. Retail sales are stagnant, and major companies are guiding lower. The U3 unemployment rate has risen to 4.0%, and initial and continuing unemployment claims are on the rise. The Fed's forecast for the end of the year for the PCE Core rate is 2.8%, but it is currently 20 basis points below that. The economy is softening, and there are concerns about the health of the financial system, especially regional and community banks. The article concludes that the Fed is already behind the curve in addressing the softening economy. [ccaef2fd]

The US dollar slipped on Friday after data showed inflation in the world’s largest economy subsided last month, cementing expectations the Federal Reserve will start cutting interest rates this year. The US personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, was unchanged last month, and followed an unrevised 0.3 percent gain in April. In the 12 months through May, the PCE price index increased 2.6 percent after advancing 2.7 percent in April. Following the inflation data, fed funds futures slightly raised the chances of easing in September to around 67 percent, from about 65 percent late Thursday, according to LSEG calculations. The market is also pricing between one to two rate cuts of 25 bps each this year. [c0fad1dd]

The lower May-24 PCE inflation and GDP growth data may lead to a rate cut by the US Federal Reserve. The final estimate of Q1-2024 GDP growth was 1.4%, lower than the previous quarters. The PCE inflation for May 2024 came in at 2.6%, lower than expected. The PCE inflation and core PCE inflation have been progressively lower in recent months. Energy inflation remains a concern. The Fed may venture into rate cuts soon, with a 64% probability of a rate cut in September 2024. The combination of GDP and PCE inflation data has increased the likelihood of a rate cut on July 31, 2024. The MOM inflation data shows a reduction in short-term inflation pressures. The Fed Futures market has been enthusiastic about rate cuts for some time. The probability of 2 rate cuts by December 2024 is 63%. By July 2025, there is a 75% probability of 3 rate cuts and a 48% probability of 4 rate cuts. The latest data on GDP and PCE inflation raises the probability of a rate cut in September and a pre-emptive rate cut on July 31, 2024. [c05fb818]

Friday afternoon’s US PCE figures will come as further welcome relief to the FOMC, with the core deflator rising 2.6% YoY in May, the slowest pace since April 2021, while the monthly deflator rose just 0.1%, itself the slowest pace since late-last year. Should inflation continue to behave itself, and incoming in line with the FOMC’s forecasts, through the summer, the first 25bp cut remains on the cards as soon as September. The pace of easing, however, barring “unexpected” labour market weakness, or an exogenous shock, should remain relatively gradual, with my base case remaining for 50bp of cuts this year in total (in September, and December) [e2876119].