Forecasts for June PCE Report Show More Inflation Progress

Forecasts for the June Personal Consumption Expenditures Price Index report show inflation continuing to improve. Falling gas prices are expected to push down the overall reading while moderating housing and medical services prices contribute to a softer core reading.

Analysts say several consecutive months of encouraging inflation data are helping bolster the Federal Reserve’s confidence that inflation is under control, which investors hope will pave the way for at least one interest rate cut this year.

Economists forecast the overall PCE Price Index to rise 0.08% on a monthly basis and 2.5% on an annual basis in June, according to FactSet’s consensus estimates. The index was flat on a monthly basis in May. Economists expect the core measure of PCE, which excludes volatile food and energy prices, to rise 0.10% on a monthly basis and 2.5% on an annual basis.

Much of the source data for the June PCE report will be drawn from the Consumer and Producer Price Index reports released earlier this month, so economists already have a detailed window into the likely path of the data. While the CPI report makes headlines because of its earlier release, the PCE report is the Fed’s preferred measure of inflation. The central bank targets 2% PCE inflation as part of its mandate—a milestone analysts say could be around the corner.

“This is going to be a benign reading,” says Kathy Bostjancic, chief economist for Nationwide Mutual. That’s good news for the Fed. Several consecutive months of cooler inflation readings “puts the flareup we saw in the first quarter squarely in the rearview mirror,” she says. “We’re likely on course for continued disinflation and good readings for the coming months.” Bostjancic expects no change in the headline monthly rate for June—slightly below the consensus estimate—and a 0.1% uptick in the core index.

June PCE Report Forecast Highlights

• PCE report release date and time: Friday, July 26 at 8:30 a.m. EDT.
• The PCE Price Index is forecast to rise 0.08% in June after remaining flat in May.
• Core PCE is forecast to rise 0.10% in June after rising by 0.08% in May.
• The PCE Price Index year over year is forecast to rise to 2.5% in June after increasing 2.6% in May.
• Core PCE year over year is forecast to rise 2.5% in June after increasing 2.6% in May.

Shelter Inflation is Finally Moderating

While falling gasoline prices will depress the overall inflation rate, Bostjancic says the Fed will pay more attention to the core reading. She expects continued disinflation in the goods category, along with more progress on shelter inflation that will mirror the CPI data released earlier this month. “There are encouraging signs in the CPI reading that rental inflation and housing price pressures overall are easing,” she says. Sticky housing inflation has been one of the biggest contributors to elevated inflation over the past year. While some data on rent inflation has pointed to a moderation of that trend, a cooling in the shelter category of the CPI and PCE index had failed to materialize until recently.

Data from the last few months “suggests that we’re starting to see the actual rental inflation component in the CPI and PCE [indexes] catch up with what we’ve been seeing in the new lease data for months,” Bostjancic explains.

Some PCE Components Could Rise, but Overall Disinflation Continues

Other components of the PCE index may have ticked up in June, but analysts aren’t all that worried about reinflation risk. Bostjancic points to asset management fees, which could rise on a strong equity market. “That’s really a reflection of the equity market doing well,” rather than a true inflationary reading, she explains.

And while producer price data came in stronger than expected in June, analysts from Bank of America point out that the components of the index used to calculate PCE inflation were relatively soft. Prices for medical and hospital services fell in June, for example. Overall, Bank of America’s analysts expect June’s PCE report to show inflation in line with the Fed’s 2% target. “In sum, disinflation has gotten back on track over the last two months,” they wrote.

When Will the Fed Cut Rates?

The Fed is almost universally expected to leave interest rates steady at its upcoming July meeting, but investors are already looking ahead to rate cuts in September or December—or both. As of Wednesday, bond futures markets were pricing in a roughly 90% chance of a 0.25% rate cut in September, according to the CME FedWatch Tool.

Central bank officials have repeatedly said they are looking for more confidence that PCE inflation is moving toward their 2% target before they will cut rates. June PCE readings in line with expectations will “surely increase and boost that confidence,” Bostjancic says. Barring any adverse inflation readings between now and September, she says the Fed is “poised to cut rates.”