US May personal consumption expenditure (PCE) data will be released at 20:30 on June 28 Beijing time (8:30 AM US Eastern Time), which is highly anticipated as it is the Fed's preferred inflation indicator. Traders are gearing up for Friday's PCE price index report in hopes of gaining further evidence on inflation trends.

Among them, the core PCE price index is especially crucial as it will reveal whether the first-quarter decline in inflation is a temporary phenomenon or a more enduring trend. April data showed a slight decline in inflation, but monthly data is not enough to determine trends.

It is understood that Fed officials are more inclined to focus on core PCE because it excludes the volatility of food and energy prices and more accurately reflects potential inflation trends. Unlike the consumer price index (CPI), PCE measures actual consumer spending and can reflect changes in consumer behavior when facing inflation.

According to Econoday's forecast, the May PCE price index is expected to slow slightly from 2.7% in April to 2.6% year-on-year, with an expectation of between 2.5% and 2.7% in the market. The PCE price index is expected to rise 0.1% month-on-month, down from 0.3% previously.

The May core PCE price index is expected to fall from 2.8% in the same period last year to 2.6%, which may mark the lowest level since March 2021. The core PCE price index is also expected to slow from a 0.2% month-on-month increase to 0.1%.

The Fed raised its PCE inflation expectations for 2024 and 2025 in June's economic forecast, while maintaining its unchanged expectations for 2026 and beyond. The core PCE inflation expectation was also raised, reflecting the Fed's cautious and optimistic attitude towards inflation prospects.

Kenneth Kim, senior economist at KPMG US, believes that although inflation is improving, progress is slow. He predicts that PCE may fall 0.1% month-on-month, and if true, the annual growth rate may fall to 2.4%, which would be significant progress in terms of deflation.

Michael Gapen, an economist at Bank of America, expects core PCE inflation to rise 0.16% month-on-month in May and fall to 2.6% year-on-year. His view supports the view that deflation is the most likely path in the future, suggesting that inflation is unlikely to continue to accelerate.

Bill Adams, chief economist at Comerica, predicts that overall PCE inflation will fall to 2.4% year-on-year, the lowest level since early 2021. He believes that except for food and energy projects, the core PCE inflation rate will fall to 2.6%.

Wall Street veteran investor Ed Yardeni expects the Fed's preferred inflation indicator to continue to move towards its target of 2.0%. Trade Nation senior market analyst David Morrison expects further evidence to suggest that inflation is softening, which could provide new impetus for the market to rise.

It is worth mentioning that KPMG's Kim will pay close attention to housing costs, energy prices, and insurance in May PCE data, especially the difference in the weight of insurance costs between PCE and CPI.

He pointed out that some producer price index data in May is favorable for the consumer price index, which may be the reason why the overall monthly change in May may result in negative results.

If actual data meets expectations, Fed policymakers may be more confident that inflation is moving towards the central bank's target of 2%. They need several months of data to confirm the inflation path before considering a rate cut.

Michel Bowman, a member of the Fed's board of governors, said that according to her basic forecast, there will be no interest rate cut in 2024, while KPMG expects only one interest rate cut in 2024.

In contrast, market expectations are more aggressive, with a 56.3% chance of a rate cut in September and a likelihood of more than 60% of at least one more rate cut by the end of the year.

Edited by Jeffrey