PCE inflation in the United States decelerated across the board in May, and the Fed's favorite core inflation measure hit a record low in more than three years, providing strong support for the Fed's expectation of a rate cut in September this year.
On June 28, the U.S. Department of Commerce released data showing that the month-on-month growth rate of the PCE price index in the United States in May fell to 0% from 0.3% in April, the lowest record since November 2023, and the year-on-year growth rate also fell to 2.6% from 2.7% in the previous month, both in line with market expectations.
What's more, the core PCE price index rose at its lowest year-on-year pace since March 2021 in May, also in line with expectations, after excluding volatile food and energy prices, to 2.6% from 2.8% in April.
March 2021 is an important time node. At that time, the core PCE price index exceeded the Fed's 2% inflation target for the first time in this inflation cycle. Previously, some analysts said that if the core PCE price forecast comes true, it will be a milestone on the Fed's road to fighting inflation.
The data also showed that the core PCE price index rose by 0.1% month-on-month in May, the lowest recorded since December 2023. However, April's reading was revised upwards to 0.3% from 0.2%.
Is a rate cut expected in September?
Core inflation measures hit a record low in more than three years, providing strong support for the Fed's interest rate cut expectations in September.
CME Group's Fed Watch tool shows that the probability of a 25 basis point rate cut by the Fed in September rose to 61%, and the probability of a further rate cut in December was 44.7%.
At the same time, San Francisco Fed President Daly said in a speech that "the PCE (price index) data further shows that policy is working", but she also noted that US inflation is still expected to exceed 2% by 2025.
Joys and sorrows! Supercore PCE prices remain high, and revenue and expenditure growth accelerate year-over-year
Even more noteworthy is the so-called super-core PCE (core services after housing) price index stagnated at a high level: it rose 0.1% month-on-month and slowed to 3.39% year-on-year. This is the 49th consecutive month of supercore PCE price increases.
This is mainly because of the soaring cost of health care.
Although high interest rates have taken a toll on some sectors of the economy, U.S. household demand has so far remained resilient.
The PCE report showed that US personal consumption expenditures increased by 0.2% month-on-month in May, below expectations of 0.3%, but the previous value was revised down to 0.1% from 0.2%. Revenue growth rose to 0.5% m/m in May from 0.3%, beating expectations of 0.4%.
Inflation-adjusted spending on services rose 0.1% month-on-month, mainly driven by airfares and healthcare. Spending on goods rose 0.6 percent, mainly driven by computer software and automobiles.
Year-over-year growth in both revenues and expenses accelerated.
Government spending rose 8.5% year-on-year in May, up from 8.4% in the previous month but below the record high of 8.9%, as wage pressures rose again. Private sector spending rose to 4.5% year-on-year from 4.2% in April.
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