On Friday local time, the United States will release the Consumer Expenditure Price Index (PCE) for June. With the recent intensification of volatility in the US stock market, this will also attract more attention from the outside world.
Given that the Federal Reserve meeting minutes and officials' speeches have repeatedly mentioned the increasingly balanced risks, if the latest data meets or exceeds expectations, discussions on policy shifts may not be far away. However, considering the resistance and uncertainty faced by inflation moving towards 2% in the future, there is also uncertainty in the path after the first interest rate cut.
Price growth rate is expected to further decline
According to the latest CPI data, Wall Street institutions predict that PCE in June may increase by 2.4% year-on-year and 0.1% month on month, with core PCE increasing by 2.5% year-on-year and 0.1% month on month
Due to the decrease in gasoline costs and the slowdown in rental increases, the Consumer Price Index (CPI) fell by 0.1% month on month in June, and the year-on-year growth rate dropped to 3%, reaching the lowest level since 2021. Deflation has returned to the right track, as the slight increase in service costs was offset by the decline in commodity prices. However, PPI rose by 0.2% month on month in June, coupled with the upward revision of previous month's data, indicating an increase in upstream cost pressure.
As the preferred inflation indicator of the Federal Reserve, PCE remained unchanged in May compared to the previous month, with a year-on-year increase of 2.6%. Excluding volatile food and energy, the core PCE increased by 0.1% month on month and 2.6% year-on-year.
As commodity prices fall, Federal Reserve officials are closely monitoring changes in service prices within core inflation to measure their latest progress in combating inflation. The data released by the Institute for Supply Chain (ISM) earlier this month may have given a positive signal, as the ISM service sector index fell to 48.8 in June due to a sharp decline in business activity and orders, falling below the boom bust line for the second time in three months. Analysis suggests that this will be an important signal for the release of service inflation pressure.
Personal income and monthly personal expenditure rates are also released simultaneously with PCE. Both have important reference significance for predicting future price trends, and the weakening of consumer spending and income expectations helps reflect the impact of demand on inflation.
In a report sent to First Financial reporters, Wells Fargo wrote that as excess savings are depleted, high loan costs are putting pressure on consumer behavior. The demand for entertainment products and durable goods sensitive to interest rates has significantly weakened. However, considering the recent rebound in retail sales, the monthly expenditure rate is expected to increase by 0.4%, which is 0.2 percentage points faster than May.
Personal income will continue to steadily increase, with an expected growth rate of 0.4%, a decrease of 0.1 percentage points from May. The bank believes that as the labor market returns to its normal state before the pandemic, the slowdown in wage growth is the next headwind facing consumers.
The Federal Reserve may face new challenges
Due to the continued impact of inflation and economic uncertainty, the University of Michigan's July Consumer Confidence Index fell to a six-month low again. The survey shows that the 1-year inflation expectation is 2.9%.
Despite signs of easing price pressure, Jamie Damon, CEO of JPMorgan Chase, recently issued another warning. There are still multiple inflation factors in front of us in the future: huge fiscal deficits, infrastructure demand, trade restructuring, and geopolitical risks. Therefore, inflation and interest rates may be higher than market expectations
Several senior officials of the Federal Reserve have also expressed hope that the data will further confirm that inflation has slowed down enough to justify a rate cut. Federal Reserve Chairman Powell acknowledged the recent improvement trend in price pressure during his congressional hearing this month, but emphasized that he is not yet ready to announce that inflation has been defeated, and "more good data" will strengthen the reasons for interest rate cuts.
The institution has provided many short-term price risk factors. Firstly, the cost of car insurance has risen sharply in the past year, with a year-on-year increase of 20.3%. Bankrate senior economic analyst Mark Hamrick said, "There are different reasons for this, including an increase in claims, rising car repair costs, and more frequent extreme weather events that may damage vehicles." He expects these costs to not decrease significantly soon.
Secondly, there is the factor of electricity cost. As the hottest time of the year approaches, consumers' electricity bills may only continue to rise. The latest forecast from energy researchers shows that the average cost of refrigeration for American households is expected to reach $719 from June to September this year, higher than the previous year's $661.
Thirdly, the cost of dining out further exceeds the overall inflation rate. As restaurant prices continue to rise, some consumers choose to cut restaurant expenses. Many companies have begun to feel these impacts: McDonald's and Starbucks reported weak sales in the first quarter. Some chain stores have responded by lowering prices or offering new discounts. The University of Michigan Consumer Survey includes an open-ended question that asks consumers to evaluate their personal financial situation compared to a year ago, with approximately 20% of responses mentioning food costs.
It is worth noting that the Cleveland Fed inflation model suggests that PCE may experience a slight rebound in July.
Bob Schwartz, Senior Economist at Oxford Economics, previously told First Financial Journalist that if the upcoming PCE is better than expected, the Federal Reserve will officially put discussions on policy shifts on the agenda. However, he believes that this will not change the path of the Federal Reserve's data dependence, and further interest rate cuts in the future will still depend on the performance of economic data. The data may fluctuate in the future, and a policy test for the Federal Reserve is about to come
Stephen Stanley, Chief Economist of Santander Capital Markets, is concerned that recent inflation reports may exaggerate the pace of inflation slowdown. The prices of some goods and services have experienced unusual declines. He believes that this situation will not last long, and the Federal Reserve may experience another unwelcome data surprise, delaying the window for the first rate cut until November or later.