What To Expect From Friday’s Inflation Report

Introduction to Inflation

Consumer prices are expected to have risen slowly in May, according to the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures (PCE). This indicator is crucial as it reflects the overall change in prices of goods and services purchased by consumers.

Key Points About Inflation

• Consumer prices likely rose by 0.1% in May, the same increase as in April.
• Core PCE prices, which exclude volatile food and energy prices, are expected to have risen by 0.1% over the month, leading to a 2.6% annual increase, up from 2.5% in April.
• The Federal Reserve targets a 2% annual inflation rate, indicating that inflation still needs to decrease from the central bank’s perspective.

Understanding PCE Inflation

The Bureau of Economic Analysis is set to release a report on PCE inflation, which is anticipated to show a 0.1% increase in prices for consumer purchases during May. This would result in a 2.3% increase over the past 12 months, rising from a 2.1% annual increase in April. Core PCE inflation, which excludes food and energy prices, is predicted to have also increased by 0.1%, with the year-over-year measure accelerating to 2.6% from 2.5% in April.

The Significance of Core PCE Inflation

Core PCE inflation is particularly important because it serves as the Federal Reserve’s benchmark for determining whether prices are rising at its target rate of 2% a year. Although core PCE inflation has decreased from its peak of 5.7% in 2022, it remains above the Fed’s target, suggesting that the Fed may continue to monitor and adjust its monetary policies accordingly.

Tariff Impacts Loom

The expected inflation report corresponds with May’s Consumer Price Index report, which indicated that inflation is still cooling despite the implementation of wide-ranging tariffs by President Donald Trump. Many forecasters predict that import taxes will push up inflation measures starting this summer. However, the relatively low inflation reading is unlikely to reassure Federal Reserve officials, who are preparing for the potential impact of tariffs on inflation.

Federal Reserve’s Stance on Tariffs and Inflation

Fed Chair Jerome Powell has expressed concerns that tariffs could stoke inflation. During the Fed’s decision to hold its key interest rate flat and in subsequent testimony before Congress, Powell reiterated the risks associated with tariffs. Economists share these concerns, noting that the full extent of tariffs still looms large over the near-term inflation and growth outlook.

Conclusion

In conclusion, the anticipated slow rise in consumer prices in May, as indicated by the PCE, reflects a continued descent in inflation rates. However, with core PCE inflation remaining above the Federal Reserve’s target and the looming impacts of tariffs, the inflation landscape is complex. The Federal Reserve will likely continue to closely monitor inflation metrics and adjust its policies to achieve the 2% annual inflation rate target, while also considering the broader economic implications of tariffs and other factors influencing inflation.