Tiffany Wilding, Economist at PIMCO, shares her insights on the reading of the Personal Consumption Expenditures (PCE), an inflation gauge closely watched by the Federal Reserve in the US.
What happened?
The US released on Thursday the latest reading of the Personal Consumption Expenditures (PCE), an inflation gauge closely watched by the Federal Reserve. It showed that headline and core inflation rose in May, pushing year-over-year growth at 4.1% and 3.4%, respectively, well above the rate the Fed targets with its monetary policy.
In other data this morning, consumer spending was also weaker than expected, with 1H real consumption growth now looking closer to 1.3% – a material deceleration vs last year, signaling the household sector was not immune to falling real income growth, and higher policy related uncertainty from the middle east developments.
What does it mean?
A series of supply shocks have pushed inflation well above target, and weighed on real household incomes. However, the good news is that the latest PCE readings most likely represent the peak for inflation. The drop in global energy prices since May mean the headline is poised to decline, falling below 2% by early next 2027- possibly even as low as 1%. Core inflation has also likely peaked.
Higher energy prices were also rising core prices for transportation services, including airfares, which will now reverse. In addition, the temporary effects of the one-time tariff related price adjustment should also be fading. To be sure, the ongoing demand for AI-related components, which has pushed prices for memory and chips and spilled over into consumer goods prices, will likely keep core inflation above the Fed target this year, despite some moderation from the currently elevated 3.4% pace.
What’s next?
As for what this means for the monetary policy, our base case remains a Fed on hold for the remainder of the year. Because inflation has been so elevated in the first five months of the year, the Fed will likely need to see an actual moderation in inflation before thinking about moving rates.
“However, recent developments should relieve some of the inflationary worries from those FOMC participants who thought policy rates would need to be higher by the end of the year. As of the June SEP, the committee was divided as to whether to hike rates or remain on hold.”
Tiffany Wilding, Economist at PIMCO
