Summary: US Fed’s favoured inflation measure rises 0.1%; more than market expectations; previous month recorded 0.4% fall; Treasury bond yields fall as coronavirus infection rate rises.
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 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 in April 2020.
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 increased by 0.1% for the month, above the flat result which had been expected and more than April’s 0.4% decrease. On a 12-month basis, the core PCE inflation rate remained unchanged at 1.0%.
NAB economist Tapas Strickland said the figures indicated there is “little in the way of inflationary pressure.”
Despite the higher-than-expected result, US Treasury yields finished lower as the daily rate of new coronavirus infections in the US climbed. By the end of the day, the 2-year yield had slipped 1bp to 0.17%, the 10-year yield had lost 3bps to 0.65% and the 30-year yield finished 6bps lower at 1.37%.
In terms of US Fed policy, a rate change of any sort remained unlikely given the federal funds rate has been at the effective lower bound since the US Fed reduced it on Sunday 15 March. However, the July OIS contract price implies traders think there is about a 25% chance of a 25bps decrease in the federal funds rate target at the next meeting of the FOMC.