On Friday, "Fed's favorite inflation gauge" is expected to cool down, with the market focusing on the latest interest rate cut signals!

According to the Wise Finance APP, the US personal consumption expenditure (PCE) data for May will be released on June 28 at 20:30 Beijing time (8:30 am US Eastern time). This release is highly anticipated as it is the Federal Reserve's preferred inflation indicator. Traders are actively preparing for Friday's PCE price index report in hopes of obtaining further evidence of inflation trends.

In particular, the core PCE price index is crucial as it will reveal whether the first-quarter decline in inflation is a temporary phenomenon or a more persistent trend. The data for April showed a slight decrease in the inflation rate, but monthly data alone is not sufficient to determine a trend.

It is understood that Federal Reserve officials tend to focus on the core PCE as it excludes the volatility of food and energy prices, providing a more accurate reflection of underlying inflation trends. Unlike the Consumer Price Index (CPI), PCE measures actual consumer spending, reflecting changes in consumer behavior in the face of inflation.

According to Econoday's forecast, the May PCE price index is expected to slightly slow down from 2.7% in April to 2.6% year-on-year, with market expectations generally ranging from 2.5% to 2.7%. The PCE price index is expected to increase by 0.1% month-on-month, a decrease from the previous 0.3%.

The core PCE price index for May is expected to decrease from 2.8% in the same period last year to 2.6%, possibly marking the lowest level since March 2021. The core PCE price index is also expected to slow down from a 0.2% increase month-on-month to 0.1%.

In its June economic forecast, the Federal Reserve raised its PCE inflation expectations for 2024 and 2025 while maintaining its unchanged expectations for 2026 and beyond. Expectations for core PCE inflation were also raised, reflecting the Fed's cautiously optimistic outlook on inflation prospects.

Kenneth Kim, a senior economist at KPMG USA, believes that although inflation is improving, progress is slow. He predicts that PCE may decrease by 0.1% month-on-month, which, if true, could lower the annual growth rate to 2.4%, a significant step towards deflation.

Michael Gapen, an economist at Bank of America, expects the core PCE inflation rate to increase by 0.16% month-on-month in May, with a year-on-year decrease to 2.6%. His view supports the notion that deflation is the most likely path forward, implying that inflation is unlikely to continue accelerating.

Bill Adams, Chief Economist at Link Bank, predicts that the overall PCE inflation rate will decrease year-on-year to 2.4%, the lowest level since early 2021. He believes that after excluding food and energy items, the core PCE inflation rate will drop to 2.6%.

Ed Adney, a seasoned investor on Wall Street, expects the inflation indicator favored by the Federal Reserve to continue moving towards the 2.0% target. David Morrison, Senior Market Analyst at Trade Nation, anticipates further evidence indicating a softening inflation trend, which could provide new momentum for the market to rise again It is worth mentioning that KPMG's Jin will closely monitor the housing costs, energy prices, and insurance in the May PCE data, especially the difference in weight of insurance costs in PCE compared to CPI.

He pointed out that some Producer Price Index data in May are favorable to the Consumer Price Index, which may be the reason for a potential negative outcome in the overall monthly change in May.

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

In response, Federal Reserve Board member Michelle Bowman stated that based on her baseline forecast, there will be no rate cut in 2024, while KPMG expects only one rate cut in 2024.

In contrast, market expectations are more aggressive, with a 56.3% probability of a rate cut in September and over a 60% probability of at least one more rate cut by the end of this year