The US inflation indicators are slowing down, and the PCE is expected to stabilize. The market expects the Federal Reserve to cut interest rates multiple times this year.

Unexpected slide in inflation data boosts Wall Street optimism

According to two price reports that exceeded expectations this week, the inflation indicator favored by the Federal Reserve, PCE, is expected to achieve its smallest increase since November last year. The index will be released later this month.

The producer price data released by the Bureau of Labor Statistics on Thursday showed a decline in prices for some key categories, which will affect the Federal Reserve's preference for the Personal Consumer Expenditure Price Index (PCE). Adding to the lower than expected Consumer Price Index (CPI) data released on Wednesday, most analysts expect the core PCE index (excluding food and energy) to rise only 0.1% in May.

Fed rate cut likely to start in September

This data will support the expectation of two interest rate cuts this year, and the market is expected to start from September this year. The latest quarterly forecast released by the Federal Reserve on Wednesday shows that it is expected to only cut interest rates once. But after the data was released on Thursday, investors raised their expectations for a 0.25 percentage point rate cut in September to about 65%, and their expectations for a rate cut in December to about 80%.

Analyst forecasts and data details

According to Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, based on PPI and CPI data, it is estimated that the core PCE deflator index rose only 0.11% in May, far below the average growth rate of 0.32% in the first four months of this year. Capital Economics North American Chief Economist Paul Ashworth and Citi economists also predict similar increases of 0.11% and 0.15%.

Some key category changes shown by PPI data in May include a 4.3% decrease in airfare prices, a 1.8% decrease in portfolio management service prices, flat physician care costs, and a 0.5% increase in hospital outpatient care costs.

Fed's predictions may be outdated

Based on CPI and PPI data, the new quarterly forecast released by the Federal Reserve this Wednesday afternoon may be outdated.

The latest forecast shows that officials expect the core PCE index to be around 2.8% this year, while the forecast for March is 2.6%. Federal Reserve Chairman Powell stated at a press conference that most policymakers may not have included the CPI data released earlier that day in their forecasts and described them as "conservative".