US core PCE expected to jump; can the Fed turn a blind eye?
XM Group | May 25, 2021 11:18AM ET
Core PCE inflation could shoot higher
When inflation expectations first began to reach worrying levels, markets were sceptical about the Fed’s relaxed stance towards the simmering price pressures. But after some not-so-spectacular data on the labour market and consumption, investors are happier to follow the Fed’s ultra-dovish guidance on the policy path. However, as markets try to make sense of the conflicting indicators on the strength of the US recovery, the higher inflation narrative could be about to become validated.
The core PCE price index, which is what the Fed looks at when aiming to keep inflation near 2%, is expected to have jumped to 2.9% year-on-year in April from 1.8% previously. Although the low base effect from 2020 is likely to blame for most of this increase, the fact that the core measure is anticipated to have risen so much so quickly to levels last seen in 1993 can only be interpreted as the start of a very dangerous trend.
Ahead of Friday’s numbers, durable goods orders for April will be watched on Thursday, along with the second reading of Q1 GDP growth. Durable goods orders are forecast to rise for the second straight month, while the preliminary GDP estimate of 6.4% is predicted to get revised up slightly to 6.5%.
On Tuesday, the latest consumer confidence index by the Conference Board showed consumer sentiment was little changed in May compared to April, with the index falling slightly to 117.2, which is notably below pre-pandemic levels of above 130.0.
Fed to stay on hold for a while longer
The data underlines how the recovery still has some way to go, supporting the Fed’s view that further progress is needed. Until the Fed is satisfied that all sectors of the economy have recovered or are close to being fully healed from the pandemic, it’s stance on monetary policy is unlikely to change, unless of course the spike in inflation turns out to be not so transitory. But that is a story for later in the year.
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