For a whole year, the Federal Reserve has been waiting for good news on inflation. Tonight, its favorite inflation index, the May Core Personal Consumption Expenditure Price Index (PCE), is likely to become a milestone on the road to anti-inflation in the United States.

Wall Street expects the US May PCE price index to decline across the board, with core PCE prices likely to hit their lowest level in 38 months since first breaking 2% in March 2021.

A milestone on the road to anti-inflation?

The US Department of Commerce will release the May PCE report at 20:30 Beijing Time.

More importantly, after excluding food and energy prices that fluctuate widely, the year-on-year growth rate of the core PCE price index in May is expected to hit its lowest level since March 2021, falling from 2.8% in April to 2.6%. March 2021 was an important time point. At that time, the core PCE price index first exceeded the inflation target of 2% set by the Federal Reserve in this inflation cycle.

Lastly, the growth rate of the May core PCE price index is expected to be 0.1% month-on-month, the lowest level since December 2023.

In addition to inflation data, the US Department of Commerce will also release May personal consumption and income data, with growth expected to be 0.4% and 0.3%, respectively, up 0.1 percentage points from April.

Analysts believe that if the core PCE price forecast comes true, it will be a milestone on the Federal Reserve's road to anti-inflation. Bank of America Chief Economist Beth Ann Bovino said,

"Our forecast is in line with the (market expectation) that core PCE price data will return to a more moderate level. This is good news for the Fed and people's wallets, although I don't know if people have felt it yet."

Before the heavyweight PCE inflation data was released, gold fell slightly, the dollar rose slightly, and the yield on US 10-year Treasury bonds rose slightly.

Some analysts believe that if the May PCE price is in line with Wall Street expectations, the Fed's expectations of a rate cut may rise, which could be supportive of the US bond market, and the dollar may not fall sharply due to the weakness of the euro.

"Will the Fed cut rates once or twice this year? The market is more optimistic than the Federal Reserve."

Indeed, although the inflation rate has fallen significantly from its peak in mid-2022, prices have not fallen. Since March 2021, the core PCE price has risen 14%. Because prices have been rising, even if the pace of the rise has slowed significantly, the Fed is not ready to declare victory over inflation.

Federal Reserve Governor Lisa Cook said earlier this week:"Returning inflation to our 2% target on a sustained basis is a process, not a fait accompli."

Cook expects annualized inflation rates for the past three and six months to be closer to the Fed's 2% target.

Fed officials have been cautious about the timing and pace of rate cuts, with the June dot plots showing the Fed cutting rates only once this year, down two from its March projection.

In contrast, the market is more optimistic. The futures market currently expects the Fed to cut rates for the first time in September, and to cut rates again before the end of the year.

Federal Reserve officials have always been cautious about the timing and pace of interest rate cuts. The June plot chart showed that the Fed only cut interest rates once this year, which was two less than the forecast in March.

In contrast, the market is more optimistic.

The futures market currently expects the Fed to likely cut interest rates for the first time in September, by 25 basis points, and will cut interest rates again before the end of the year.

Bovino says:

Now we all know it depends on data, and the Federal Reserve is still observing. Will they wait?

Will there only be one rate cut this year? I cannot rule out this possibility. But it seems that data may give the Federal Reserve a reason to cut rates twice this year.

Citigroup warns that despite the year-on-year decline in PCE prices, the Federal Reserve cannot rely too much on this data, as its year-on-year growth rate will rise again in the coming months due to base effects.

Citigroup is especially concerned about the situation of service consumption expenditures, because service consumption often lags behind commodity consumption, if service consumption expenditures also show signs of slowing down, this will help the market and Federal Reserve officials be sure that the economy has begun to cool down.

Over the past two years, the US economy has avoided a recession due to strong consumer spending.

But this trend seems to be weakening, especially as commodity consumption expenditures have dropped significantly. Now the focus is on whether service consumption expenditures are also slowing down.

Editor/Somer