Summary: US core PCE price index up 0.1% in May, in line with expectations; annual rate slows to 2.6%; ANZ: lowest since March 2021; Treasury yields rise; Fed rate-cut expectations soften; ANZ: disinflation process remains in place.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly and still remains above the Fed’s target even after recent declines.
The latest figures have now been published by the Bureau of Economic Analysis as part of the May personal income and expenditures report. Core PCE prices rose by just 0.1% over the month, in line with expectations but down from April’s 0.3% increase. On a 12-month basis, the core PCE inflation rate slowed from 2.8% to 2.6%.
“The annual rise in core inflation was the lowest since March 2021 and was supported by a modest 0.1% rise in super-core inflation (services inflation excluding food, energy and housing),” said ANZ Head of Australian Economics Adam Boyton.
US Treasury bond yields rose by increasing amounts along the curve on the day. By the close of business, the 2-year Treasury bond yield had added 5bps to 4.76%, the 10-year had gained 11bps to 4.40% while the 30-year yield finished 13bps higher at 4.56%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened slightly, although at almost four 25bp cuts are still currently factored in. At the close of business, contracts implied the effective federal funds rate would average 5.305% in August, 3bps less than the current spot rate, 5.245% in September and 5.085% in November. June 2025 contracts implied 4.375%, 96bps less than the current rate.
“The 2.6% rise in core inflation was below the FOMC’s year-end forecast of 2.8% whilst the 2.6% rise in headline inflation was in line with the FOMC’s forecast for Q4,” Boyton added. “The data support our view that the disinflation process remains in place.”
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.